But be aware that the negative debt listings will reappear on your credit report. There is another solution to avoiding the debt. You can create a true win-win situation by settling your debt with the creditor.

The average consumer will settle a debt for about 75 cents on the dollar. A professional negotiator, on the other hand, typically will settle a debt for about 60 cents on the dollar, including their fees. Creditors will not take you half as seriously as they will your lawyer. Handled properly, you will save time and money by seeking the services of a good attorney to negotiate with your creditors. 

What is Fact and what is Fiction?

Foreclosures, repossessions, wage garnishments are measures which cause fear into the heart of every consumer. But how do these methods of recovery play out in the real world, and whom are they used against -- the facts?

The general assumption is that overdue debts will result in drastic recovery measures. Sure, if you've put up property as collateral on a loan which you are unable to pay, it will typically be seized or repossessed. But the same does not necessarily hold true for unsecured debts such as credit cards and deficiencies.

In reality very few creditors will ever push for garnishment on small unsecured debts. Garnishment and seizure are a creditor's most effective weapons to collect an outstanding debt, but they are also very expensive and time-consuming to the creditor. While it is within the creditor's legal rights to pursue collections through any of these means, the cost of recovering a debt often exceeds the amount of the debt itself, and so it's not always cost efficient to force a collection.

Sadly enough, in the United States alone thousands of bankruptcies are filed every week in response to collection efforts on unsecured debts under $5000. Consumers are so intimidated by creditors that they fold under the perceived pressure, resorting to bankruptcy as a means of escaping an unsecured debt. If these same consumers had simply ignored the threatening letters and intimidating phone calls, they would have discovered that most creditors are all bark and no bite. Bankruptcy is arguably the worst type of negative listing you can have, and it is sure to wreak havoc on your credit for the next ten years. You should therefore consider bankruptcy only as a last resort, and possibly never as an option to escape a relatively small, unsecured debt. 

Types of Debts to Settle

Not all types of debts can be settled. Secured, collateralized debts such as a home or automobile usually cannot. Since creditors can simply repossess the property on which you've defaulted, there's no convincing reason for them to negotiate. You might be able to renegotiate a short payment relief for a secured debt, but don't expect to settle the account while you are still in possession of the property.

Unsecured debts, on the other hand, are often negotiable. An unsecured debt is one where there is no collateral. These include medical bills, credit cards, department store cards, personal loans, collection accounts, student loans, amounts remaining after foreclosure or repossession, and bounced checks. Interestingly enough, utility companies generally won't settle for less than the full balance. Creditors who will never compromise are few and far between. Most will accept less than full payment to close a delinquent account.

But before a creditor is willing to settle a debt they must have a good reason to want to do so. If your account is current and there is no recent history of late payments, it will be difficult to convince the creditor that they should settle. After all, they've gotten your money in the past so there is no reason they shouldn't get paid now. This is not to say that you should stop paying your current bills, which will only make your credit situation worse. Under certain circumstances, however, you may feel you need to stop paying your current bills and try to settle them in order to make your debts manageable. Naturally if you do this, you do so at your own risk. 

If you can withstand the pressures from creditors long enough you will find that their collection efforts subside in due time. Eventually the debt is written off as a loss and becomes a corporate tax write-off. Ironically, the longer the debt remains uncollected, the better your chances are of getting a favorable settlement.

Of course, that does not mean that you no longer owe the debt. The creditor can still attempt to collect the debt themselves, sell or assign the debt to a collection agency, or press for a judgment and garnishment. What they do depends on the company and the size of the debt, and varies greatly from one creditor to the next.

When a creditor demands payment, individuals rarely have sufficient funds to cover the entire debt. Often interest fees and penalties put the debt well beyond the scope of the affordable for the consumer. It is therefore in the best interest for both parties to try and negotiate a reasonable settlement.

However, don't expect to negotiate a settlement as long as the creditor believes he has the upper hand. For example, if you tell a creditor that you need to resolve the matter in order to get into your dream home, you can forget any kind of settlement. The creditor will settle for nothing less than the full balance.

The creditor must believe you have virtually no money before they will consider negotiating a settlement. Get them to believe you are on the edge of bankruptcy. Your attorney should approach each creditor as though this is their last chance to recover any money from you before declaring bankruptcy, after which point they will not be able to recover the debt from you.

Bear in mind, time is on your side. Never look too eager to settle. Take all the time you need to reach a reasonable agreement. Don't accept the first settlement offer, nor the second. Make sure that they are the ones demonstrating an initiative to move the settlement forward.

You have the natural advantage in debt settlement because the creditor wants something from you. Hold out on settling until the creditor offers the terms you want. Once you send them a settlement check, you lose your advantage. So make sure you get your terms in writing before you write that check.

There is little incentive.

Our credit reporting system provides little incentive for you to pay off your debt. If you ignore the debt long enough, you stand a good chance of never hearing from the creditor again. Seven years after the debt is written off, the negative listing disappears from your report altogether. But if you pay the debt sometime before the end of that period, the seven year cycle starts all over again, not exactly what one would call an incentive. It's like getting time added to your sentence for good behavior.

Fortunately, creditors make their money by collecting the debts, not by reporting negative credit information. Creditors recognize this catch-22, and are therefore often willing to delete the negative listing upon settlement. If you are going to settle with a creditor, be sure to negotiate removal of the listing from your report.

Collection agencies are always more agreeable to delete a negative listing than are banks or credit card issuers. The only time you might run into problems is when the collection agency represents a large institutionalized creditor. Many creditors have an agreement with the credit bureaus that they will not allow a negative listing to be deleted upon settlement. Larger creditors such as the credit card giants or banks will require considerably more pressure before they give in to your demand. Virtually every creditor will succumb given the right amount of convincing.

Every creditor who reports to the credit bureaus can also change the information they report. In most credit organizations, there are dozens of people with the authority to make changes on the credit report. Anything a creditor reports, a creditor can change.

There are two ways you can approach deletion of negative information in response to settling a debt with a creditor: pre-notification of terms, and post-notification of terms.

Pre-notification of Terms -- you tell the creditor up-front that you require the deletion of the entire negative listing as a part of the payoff. Definitely obtain this agreement in writing before the payoff takes place.

Advantage: You will save yourself time and frustration. There is also less of a chance that you will have to fight the creditor later to actually delete the negative listing.

Disadvantage: If the creditor discovers that your credit is important to you, they may change their mind and demand a larger settlement amount— sometimes as much as the full balance.

Post-notification of Terms -- Once you have concluded your negotiations with the creditor, you include a "conditional endorsement" document with your settlement check. This document, which should be drafted by your attorney, informs the creditor of your terms for settlement. In your case you will insist that you are settling the debt on the condition the creditor delete your negative listing.

Advantage: Most of the time you will get a more favorable settlement amount this way. The creditor is often sufficiently tempted by the payoff that they deposit the check without blinking at the new terms.

Disadvantage: The creditor could reject your terms and return the check to you. Subsequently, the creditor might ask for more money or backout on the deal altogether. In the worse case the creditor deposits the check without following through with your demand. You will then have to fight the creditor later and force them to delete the listing.

Never expect a creditor to meet a verbal agreement. Document everything in writing, no matter how "good" you feel about the representative you speak to. You will likely have to fight the creditor to get them to live up to their end of the bargain, even when you have written documentation.

You may find that some creditors refuse to agree to a deletion under any circumstance. Yet every creditor will eventually agree to your terms if you speak to the right person or hold off long enough. But if you are on a time-line and your attorney is unable to obtain an agreement for full deletion, there are a couple of other options you have.