Settling Your Debt for Less Than You Owe

You owe money – most people do, but what do you do when the amount you owe has gotten out of control? What do you do when your debt has become a crippling element in your life that spills over into the lives of others, including those you love? What if the amount you owe is simply too much to repay or even control? The answer might be settling your debt for less than you owe.

Some argue the ethical question of paying less than originally agreed, but this is balanced by the nature of interest, penalties, and the general design of debt to snowball – to increase in all ways possible – by creditors. If this were not the case there might not be agencies and legislation that specifically exist for the protection of consumers.

Another factor is simple business. A creditor who has no real hope of ever collecting from you would much rather settle on an amount greater than zero, and indeed greater than a negative figure, possible when you factor in collection costs.

Unsecured Debts

For personal debts, credit cards, debts to local merchants and professionals and general unsecured debts there are several proven strategies for eradicating the debt for less than owed.

You can negotiate settlements for less than owed either on your own or by enlisting professional help, such as a professional debt negotiator, consumer credit agency, or consumer protection attorney.

If you do handle your own negotiations the first step is to prepare for your approach. You will likely need to convince the creditor that the amount owed is uncollectible in your case. You might suggest you are considering personal bankruptcy, in which case they are likely to receive nothing or at the most twenty percent of the debt over the next five years. How flexible might they become considering those alternatives!?

In any written communications consider sending a cc or carbon copy (without the carbon) to an applicable state comptroller or other probable interested regulatory agency. This may have a motivating effect as well, if you can garner some favor with the agency and the creditor suspects this. It will certainly tend to insure at least fair treatment in the matter.

While not technically lowering the amount you owe, you might also consider accepting or even negotiating for a lower interest rate or reduced payment. This will at least buy some more breathing room in the present and allow more funds to allocate toward other areas of your financial situation.


While careful consideration should be given and professional consultation should be sought prior to filing personal bankruptcy, it is possible with a chapter seven filing to eliminate all unsecured debts, and with a chapter thirteen filing to pay only twenty percent of your debt, spread over five years.


With these kinds of debts it may also be possible to barter for all or part of your balance, especially if your own trade, service, or profession happens to be something your creditor can use, saving you cash and creating a win-win.


A more radical approach and previously unheard of is called crowdfunding. There are numerous websites that put investors together with new businesses and inventors, and there have been at least a few that offer a forum for regular folks to seek assistance with medical bills and other financial situations by multiple contributors on a website.

Income Taxes

The IRS has in place, as required by law nonetheless, several programs for you to cease collection activity and actually settle your debt for less than you owe.

The Offer-in-Compromise is probably the most well-known of these. By disclosing detailed financial information and following the instructions in the guide, you are led to calculate an offer, sometimes just a fraction of what is actually owed, and often accepted by the IRS as payment in full, resolving the back taxes.

The acceptable amount for an OIC can be roughly your total available cash (let’s say $1,000) plus your total equity (let’s assume that’s zero) plus your available monthly cash over forty-eight months (let’s assume $100, thus equaling $4,800) for a total of $5,800. It is not historically based on the amount owed in any way, only you ability to pay as above, so if your debt was $100,000 you might settle for $5,800!

A Partial Payment Installment Agreement is a lesser-known method of paying the IRS less than you owe. It is similar to an OIC in requirements, but instead of having to pay the amount in one lump sum or in the very near future in several installments, you can opt to pay over several years if you qualify by (lack of) ability to pay the full amount.

Another interesting possibility is a chapter seven bankruptcy to wipe out older tax debts. A friend recently discharged over twenty-thousand dollars in tax debt by filing chapter seven bankruptcy – on his own without a lawyer nonetheless! – because the taxes were old enough and met several other requirements.

Mortgage Balance

Mortgage balances have been reduced en masse in times of late! As so many Americans are upside-down, or owing more than their home is worth and unable to make payments, banks have resorted to loan modifications and accepting short sales.

With a loan modification your mortgage company will have you compete an application and possibly lower your mortgage balance and your interest rate in order for you to remain in your home and be better able to make your monthly payments.

Find out more at regarding the Home Affordable Modification Program (HAMP®) and other government programs that reduce your balance, payments, or both!

Student Loans

While private student loans are usually susceptible to the strategies mentioned for unsecured debts, government-insured student loans are generally near impossible to reduce or even discharge with a federal bankruptcy filing. There have been murmurs, however, of changes coming even with regard to this discharge-ability.

Medical Expenses

One of the most common reasons given for personal bankruptcy is accrued, over-the-top medical expenses. Subject to the bankruptcy filings already mentioned, medical expenses might possibly be candidates for settlements as well, or if it is known at the time the medical services are delivered that payment is in question and the services are needed, Medicaid might pay the bill on your behalf.

Back Rent

Believe it or not, I can advise you that as a former landlord and property manager, even back rent is possible to erase. The determining factors here are the market, the property, and how much your landlord wants to keep you.

I have actually advised landlords (yes, plural) in a tenant’s market where it takes a while to find one and rents are decreasing, to forgive past-due rent on occasion and even to rewrite a lease at a lower amount to keep a decent tenant in financial straits. It is often less costly than having a prolonged vacancy and investing in the preparation of the property for a new tenant.

If this seems unlikely and cash is hard to come by, you might try asking to renegotiate your rent if you take on more responsibility for repairs or pay weekly, for example.

The only limits in trying times to reducing your balances and settling debts for less than you owe is your own imagination and ability to research, so don’t hesitate to do so! Very often an agreeable arrangement is in the interests of both parties.



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