It would be great if we had the security of knowing that we would never lose our job, never require major medical care, and never let our debts get the best of us.

But life throws a curve ball every once in a while, and sometimes debts become out of control.

It can be very stressful to worry about how to pay the bills when you don't know how you're going to maintain the life you have built.

Your payments may be late, bill collectors may be calling, and you don't know how to get out from under your heavy debt.

What now? Bankruptcy? Well, don't jump the gun, bankruptcy is an absolute last resort in the land of debt management. Bankruptcy has serious long-term repercussions on your credit standing, may limit future job prospects, and is a real insult to your self-pride. Bankruptcy should only be considered by those who have exhausted all other attempts at getting ahead of debt.

Settle your debt for less
Debt settlement, also known as debt negotiation, may be an option for those who have already begun to lose grip of their debts, without use of the court system.

Debt settlement simply means that you negotiate with your creditors to accept a smaller lump sum amount than you currently owe. The creditor will consider the account as paid and up to date when the lump sum is received, but be aware that it can still hurt your credit, since you will not be paying the full amount of the original debt.

Nonetheless, debt settlement is still better than bankruptcy, and your credit will recover sooner than if you had filed for bankruptcy.

Keep in mind that debt settlement will not normally be possible for secured loans, such as mortgages and auto loans. Creditors are protected by the right to foreclose or repossess property that the loan is secured by. It serves no benefit to the creditor to reduce the amount you owe them, since all they have to do to recover their money is to take back the property and sell it.

Debt settlement may be an option for unsecured loans and debts, such as for credit cards and personal loans. Creditors know that someone who has suffered a punishing financial situation may eventually file for bankruptcy, and that they may not get anything if it comes down to that.

Accounts that are seriously past due are better candidates for debt negotiation. Creditors are less likely to negotiate if they feel your bad situation is only temporary or that you aren't so far behind that catching up is impossible.

Some creditors may be willing to settle for about half of what you owe them, especially if the account is soon to be charged-off, meaning that the creditor will then consider the debt noncollectable. The charged-off account is typically sold to a collection agency for pennies on the dollar, so they may be more likely to make a deal if you are willing and able to pay half of your debt.

Accounts that have already gone to collections are usually more negotiable than accounts that are still with the original creditor. Collection agencies typically buy bulk debt from many overdue accounts, knowing that much of the debt will never be recovered.

They usually don't turn down an offer of payment, even if the payment is much smaller than the amount of the original debt. You have more bargaining power with these guys, since they paid so little for the right to your debt to begin with. Negotiating with collection agencies is almost so easy that could be considered fun, at least, under the circumstances.

Forgiven debt is taxable as income
One thing to be aware of with a debt settlement is the tax issue. Any amount forgiven under a debt settlement agreement can be taxed as regular income. The forgiving creditor will send a 1099 for the year your debt was settled. Be sure to include the forgiven debt in your income when you file your taxes, so you don't have to deal with IRS issues after your debt issues.

Debt negotiators
You may have heard of debt settlement companies that negotiate for you as an alternative to bankruptcy. Debt settlement companies normally require that you pay them a monthly fee, and they will put that money, minus their fee, into a trust account until you have built up enough to pay a settled debt.

They negotiate with your creditors on your behalf, but may not negotiate that your interest charges or late fees be waived. Also, some may be actually offering to sell you a loan to pay your lump sum settlements; make an informed decision before you take out a loan to pay off other debts.

Some of these companies may be legitimate, but it's an unfortunate fact that this industry is littered with unscrupulous scammers who take advantage of desperate people who are already down on their luck. Please check with the Better Business Bureau, and run from any company that has complaints.

A local company that is a member of the Chamber of Commerce will be less likely to be a fly-by-night company who may disappear with your much needed cash. Ask a lot of questions before you agree to their services, and never give any company direct access to your checking account.

Or do it yourself
Even better yet, refuse to pay a fee for services you don't need - you can negotiate your own debts. The money you save in fees by doing it yourself will better serve you if you can use it to pay down your debts. If you can get over being intimidated by your creditors or debt collectors, it can save you money and help you get back on track with your debts.

The success of negotiating your own debts will depend on how many accounts you have, whether you are able to pay a lump sum to each of them, and how quickly you can come up with the funding for these settled debts. If you have a few delinquent accounts, it's probably best to start with the ones that are a few months late, but have not yet been charged off. At that point, the creditor knows that things aren't looking good for you (or them) and they will be more likely to work with you.

On the other hand, if you have so many delinquent accounts that you don't know how you can afford to pay even half of the debts, waiting until the account is charged-off and eventually sold to a collection agency may allow you to settle your debt for even less.

I am not recommending that you stop paying your debts so you can settle for less, but if you have already come to this point, you may have few other options.

Understand that debt negotiation should only be attempted if you truly have no other way to pay your debts. Bankruptcy is the absolute last resort, but debt negotiation comes in as a close second. Creditors don't willingly let people reduce their debts unless they believe that they may not get anything if they don't work with you.

Draw up a budget, including your necessary expenses for basic needs. Know how much you can afford to pay before you attempt a debt negotiation. It will not help your attempt if you call them asking for forgiveness if you don't know how much you can afford to pay.

Be prepared to pay the settled debt in the very near future. Many creditors and debt collectors will give you a time limit for the settled debt payment; they may expect payment in as soon as two weeks for their offer to remain valid.

Some may be as generous as to allow you to pay within two months, but I can assure you that they'll push for sooner before they agree to later. They know that bad situations can turn worse very quickly for those who are dealing with hard times, and that they may lose their window of opportunity if they let you stall for too long.

Call your creditor, or the collection agency if the debt has already been sold off. Be nice to them. Tell them what has happened in your life that has hurt your financial situation, but don't overdo the pity story; they've already heard it all before.

Let them know how you are trying to pay your debts, and how much you can afford to pay. If they won't agree to a settlement, ask them to reduce your interest rate or eliminate your past late fees to help you with your debt repayment.
Make good on your promise to pay. Then move on to your next debt when you have saved enough to pay another lump sum settlement.

As a final note, I'd like to let you in on my own experience. Years ago, a roommate had trashed an apartment that I had leased. I refused to pay the bill and told the apartment manager to go after the one who did the damage.

Well, being young and not fully understanding the way the system worked, I moved away and thought nothing of it. A few years later, I was in the process of buying a house, and found out that I had one unpaid collection on my credit report, due to that incident.

When I called the collection agency to ask how to take care of it, the guy immediately offered to accept half and call it even, without any negotiation on my part. Since he so quickly offered to take that amount, I'm sure he would have let me bargain him down much more if I tried.

But I wanted more than a collection account that was marked as "paid" - I wanted my credit record to be spotless, so I could get the best mortgage rate. After a little haggling, the collection rep's final best offer was to completely remove the negative item from my credit report, but only if I paid the entire amount in full.

So I did that, but suffered no damage to my credit from an account that had been several years overdue. I know that most people want to settle debts because they can't afford to pay in full, but if you can manage to pay off the entire original debt, at least ask to have your negative credit marks removed. It's possible that you may be able to clean up your credit, long after you thought it was damaged for good.
I got lucky. I didn't get the promise in writing, and the company still made good on their promise to "bulls-eye" the negative from my credit report. But, it is highly recommended by professionals to get the promise in writing before you pay the full balance. That may be a good idea, just to be sure.