debt settlement


I get this question a lot, a WHOLE lot: “Tiffany, how do I settle my credit card debt?”

If you have credit card debt and you want to settle it (pay less than what is owed), here’s how…

Preface: I wrote this article assuming that you are behind on your credit card payment and it is in collections. This can also work for other kinds of debt.

verify debt, debt settlement

1) Verify: Make sure the debt is yours by requesting a Debt Verification/Validation Letter. You can request one verbally or by faxing/mailing a letter to your creditor. Here is a template for you to use.

female zombie,debt settlement

2) Identify Dead Debt : Make sure that the debt is not past the Statute of Limitations and now considered Zombie Debt. According to Forbes, Zombie Debt is debt that is years old — often past the statute of limitations for you to be held legally responsible — and it is entirely owned by a debt collection agency. The statute of limitations begins calculating the last time the debt was active. So DO NOT agree anything on the phone until you get your Debt Verification / Validation Letter and can confirm the debt is not Zombie Debt. You want to avoid accidentally reactivating the Statute of Limitations by agreeing to make a payment.

Find your state’s statute of limitations on credit card debt here. If a creditor contacts you about Zombie Debt, although you still owe the debt, they cannot legally collect it as long as you have proof that it’s past the statute. Your proof can be found in the Debt Verification / Validation Letter that you should request from them.

negotiate debt, debt settlement

3) Negotiate: Try and reduce the balance of your debt to as low as possible. The debt collector bought your debt from the original company you owed and probably paid pennies on the dollar to buy it. Because of this, debt collectors will often take less than you owe if you negotiate. Call toward the end of the month to take advantage of the quotas many collectors must make before the new month begins. Start low by offering to pay 30 percent or less of what you owe and negotiate your way to an amount that you and the collector can both agree upon.

Make your offer attractive. If you’re going to ask that they settle for 70 percent off of what you owe, you should pay it in a lump sum payment. Asking for a steep reduction of your debt as well as a payment plan, is not likely to work in your favor.

shhh, debt settlement

4) Omit: Ask that they DO NOT report your agreement as settled on your credit report (this is VERY BAD and to avoided if possible). Instead, ask that they report it as, “paid as agreed upon.” Also ask if they can erase the tradelines associated with the debt. Tradelines are just the account and its history on your credit report. Tradelines can take up to seven years to drop off your report, so getting rid of negative ones early is beneficial. Your creditor may or may not agree to do so, but it’s worth it to ask, especially if you’re planning on paying a lump sum.

uncle sam, debt settlement

5) Remember Uncle Sam: Know that you may have to pay taxes on the amount that your creditor(s) excused as a result of your awesome negation skills. Uncle Sam views “excused debt” as income and wants his cut. You can avoid this by shaving off no more than $600 on the debt you owe. Anything above that amount will be reported and taxed. Be smart. It may be worth it to pay the taxes on the amount of debt that you don’t have to pay, if you can dramatically reduce what you owe.

FYI: As far as taxes are concerned, if you have a negative net worth at the time of settlement (you owe more than you own), you are insolvent and not liable to pay taxes on any forgiven debt. To know for sure, consult with a tax professional of course.


proof, debt settlement

6) Get Proof: If your creditors agree to the terms above, MAKE SURE TO GET IT ALL IN WRITING BEFORE MAKING A PAYMENT. This way, if they don’t honor what you both agreed upon, you could use what they sent you in writing as proof. You’ll also need it if you want to make corrections to your credit report, should your creditors report you incorrectly.

extras, debt settlement

Perk: You’ll see your credit score rise as a result of reducing your debt. It will jump even higher when you pay off the debt you’ve negotiated down. Thirty-five percent of your score is based upon how much debt you have in comparison to your income.

Bonus: Need some more help getting on financial track? Here are three free resources

Thoughts? Questions? Share them with me in the comments below and I’ll get right back to you. 🙂


Tiffany “The Budgetnista
(sharer of all things, frugal, fun and fabulous)

Content concerning legal matters is for informational purposes only, and should not be relied upon in making legal decisions or assessing your legal risks. Always consult a licensed attorney in the appropriate jurisdiction before taking any course of action that may affect your legal rights.

*Hey lady! Make sure to share this post with that certain, sister-friend of yours that needs help*

About the Author Tiffany Aliche

Tiffany “The Budgetnista” Aliche, is an award-winning teacher of financial education, America’s favorite, personal financial educator, and author of the New York Times Bestselling book, Get Good with Money. The Budgetnista is also an Amazon #1 bestselling author of The One Week Budget and the Live Richer Challenge series and most recently, a children's book, Happy Birthday Mali More.

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  1. These tips are so helpful. I never really thought about #2, especially. how there is a statue of limitations on debt. Wow. Good stuff and so easy to understand. Thanks, Tiffany.

  2. What a detailed and concise list! i wish I would have had this when I started paying down my debt. It’s easier than it seems all it takes is a bit of due diligence. Thanks so much for pulling this all together. Will share it far and wide!

  3. Tiffany this is awesome! I have to agree with Tonya (can’t wait to share). This will be so helpful to so many people who are willing to put in the work. Teach us Tiff.

  4. Okay this all seems like good information, but there are services (like Credit Sesame) that automate all this for you. But definitely still good to understand what they’re doing for ya 🙂

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  7. Credit card debt typically has a high rate of interest. One way to reduce the interest costs is to consolidate your credit card debt to a low interest loan. If you have a mortgage with equity, that’s a great place to start.

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