Debt Settlement & Negotiating With Creditors

debt settlement

Dealing with debts can be really messy if you don’t know how to handle it.

In the realm of financial management, debt settlement stands as a crucial strategy for individuals grappling with overwhelming debt. This approach involves negotiating with creditors to pay off a debt for less than the original amount owed.

In Malaysia, personal debts are on the epidemic rise. As per the official reports from the Bank Negara, in 2018, the overall household debt of Malaysia was about RM 1.18 trillion. Of this 46.8% was for personal consumption including credit cards, motor vehicles, and personal finance. The rest 53.2% was related to residential housing loans.

Unlike debt consolidation or bankruptcy, debt settlement offers a unique pathway to financial recovery by directly reducing the debt burden.

If you are burdened with overwhelming debt, opting for settlement is an opportunity to get back on your feet more quickly.

Debt settlement may or may not be the right choice for you depending on your financial status. It is important to carefully understand the consequences before going for a settlement option.

What is a debt settlement?

Debt settlement is a process in which individuals negotiate with their creditors to pay off a debt for less than the total amount owed. It’s a way to resolve outstanding debts by reaching a mutually agreed-upon settlement with creditors.

It is a permissible method of repayment for helping borrowers who face some financial difficulty. The settlement plan is structured in a way to reduce the hassles of repayment for debtors in crisis.

It is usually offered by debt collection companies who try to reduce the company’s debt by negotiating with the borrowers.

Debt settlement process

The debt settlement is an attractive option for consumers who owe more than their current financial capability.

However, not all debts are eligible for debt settlement. Typically, this method is best suited for:

Unsecured Debts:

These are debts for which there is no collateral backing the loan. Some of the most common types of unsecured debts include:

  • Credit card debt: Credit card debt is one of the most frequent types of debt settled through this process. Creditors may be willing to negotiate a lower payoff amount to recover some of the owed funds.
  • Medical bills: Unpaid medical bills can be substantial and challenging to manage. Debt settlement can help individuals negotiate with healthcare providers or medical billing companies to reduce the amount owed.
  • Personal loans: Personal loans that are not secured by assets can also be eligible for settlement. This includes loans from banks or online lenders.
  • Collections accounts: Accounts that have been sent to collections agencies are often eligible for settlement. These agencies purchase the debt from the original creditor for a fraction of the amount owed and may be open to settling for less than the full balance.

Non-Eligible Debts:

Secured debts like mortgages are generally not suitable which the lender can seize if the borrower defaults. Some examples of secured debts include:

  • Mortgages: Home mortgages are secured by the property itself. If you default on your mortgage, the lender can foreclose on your home to recover the debt.
  • Auto Loans: Auto loans are secured by the vehicle dealer you purchased from. If you fail to make payments, the lender can repossess the car.
  • Secured Personal Loans: Some personal loans may be secured by assets, such as jewellery or other valuable items. These are not eligible for debt settlement.
  • Child Support and Alimony: Court-ordered obligations like child support and alimony cannot be settled through debt settlement. These obligations are legally binding and must be paid as ordered.

Once the debtor discontinues their payments to the creditor, the accounts become increasingly delinquent. If such a situation continues, a point will be reached where the creditor will choose to sue or write off the debt as a loss.

Around this time, a debt collection company will be usually employed to collect the funds on behalf of the client. They will then begin to negotiate with you.

During the course of negotiations, you might be asked by the collection company to stop making any further payments to your creditor until an agreement to settle the debt is reached.

The company will try to work out a lump sum payment plan with the debtor, which will be less than the amount you owe.

Once all the payments are completed as per the agreement, the debt is considered to be fully settled by the creditor.

Choosing a debt settlement company

Selecting the right company is a critical step in the debt settlement process as it negotiates with creditors on your behalf. During this process, it’s vital to choose a reputable debt settlement company.

  • Accreditation and Reputation: Look for companies with positive reviews and proper accreditation.
  • Fee Structure: Understand how the company charges for its services.
  • Success Rate: Consider the company’s track record in successfully settling debts.

What should you know when  negotiating with a creditor?

Debt settlement and negotiating with creditors can be a complex but effective approach for managing overwhelming debt. It requires careful consideration, strategic planning, and a thorough understanding of the process and its alternatives.

Understanding how to negotiate with your creditors is the golden key to success before starting a debt settlement plan.

By approaching debt settlement with realistic expectations and a focus on long-term financial health, individuals can navigate their way out of debt and build a more secure financial future.

Strategies for Successful Debt Negotiation

Effective negotiation is key to a successful debt settlement. Here are some strategies to enhance your negotiation efforts:

1. Evaluate your present situation

Clearly know your financial limits and what you can realistically offer.

The prime thing to do before negotiating with your creditor is to asses how much you actually owe to them.

Make a list of past due accounts.

This should include

  1. Name of the creditor
  2. The amount which you owe
  3. The time period of non-payment

Once this is complete, you are ready to talk to your creditors.

2. Research your creditors

Researching your creditors is the next crucial step. This will help you to assess the settlement offer they accept.

The settlement policies are truly unique to each, such as the time and amount they will accept.

For example, some of them may not settle at all, and you might get sued, for some, you have to wait until the debt is sold off or assigned to the debt collector company, while for some others you may need to be late for at least three months before the creditor considers it for settling.

There are plenty of online forums where you could do research and interact with the past customers of your creditor.

Do keep in mind that just because the person you are interacting with through the online forum got a partial waiver doesn’t mean you could also get one.

3. Figure out a repayment plan

Now since you have a good idea about your creditor and the amount you have to pay back, you could figure out a plan that is best for you. Do keep in mind to have one or two alternatives in the event that your creditor does not agree.

Your credit scores might be affected depending on your choice.

Some of the most commonly used settlement plans are discussed below:

a. Workout agreement

A workout agreement is a good option if you are facing long term financial hurdles and have money just to keep your monthly obligations going.

With this, you are requesting your creditor or credit card company to

  1. Lower your interest rates
  2. Remove late fees
  3. Waive the minimum monthly payment

b. Hardship plan

Many creditors may consider hardship plans, which are either permanent or temporary, depending on the financial struggle faced by the debtor.

For people who are struggling due to any serious problems such as severe illness or job loss, this would be a great option.

By opting for a hardship plan, you may lower your interest rate, minimum payment due, and fees.

c. Forbearance

For companies that are in temporary financial difficulty and expect their financial health to spring up soon, a forbearance is an ideal option.

By choosing forbearance, your creditor agrees to lower your interest rate until the time you regain back your financial status.

Debt settlement

This is something that can have an impact on your credit score. However, it is the best alternative to bankruptcy.

In a debt settlement, you negotiate with your creditor to waive a certain amount from your overall debt so that you can settle with a payment that is less than what you originally owe to your creditor.

Once you start a negotiation, begin with a lower offer of repaying 50% of what you originally owe. Most creditors will eventually agree for repayment of 60% to 70% of your debt.

If you can promise an immediate transfer of money, chances are more likely that your creditor will settle immediately.

4. Be cautious of the risks involved

Although there are several negotiation options, each comes with its own drawbacks.

The settlement you choose will be related to your financial status. With a proper workout agreement with your creditor, your creditor may nevertheless cut off your credit line for the future, making your credit line no longer applicable.

Your creditor might report your payment issues to the major credit bureaus, which would minimise your chance of getting loans in the future.

5. Talk to your creditor

Once you have carefully evaluated all the possible options, call your creditor. In the scenario that your creditor is a company, ask for someone in the debt collection and recovery or accounts department.

Engage in open and honest communication with creditors.

Very politely explain your situation to them and factors which lead you to non-payment such as unexpected financial loss, loss of employment, sudden illness, or accidents.

Be ready to expect a no at first. Don’t lose hope and try to be persistent. Sometimes it takes several phone calls for them to agree with you.

Make sure to document every conversation you have with them. This includes names and job titles, points of discussion, etc.

When dealing with debt, each company has its own policies and programmes, so do not assume that one creditor is the same as another.

6. Get the agreement in writing

Once you have finished negotiating with your creditor and reached an agreement, it is imperative to get the proposal in writing. Document everything and keep a record of all communications and agreements.

The agreement should bear

  1. Your name
  2. The name of your creditor or the debt collector
  3. Account number

Besides, it should also mention the details of the settlement, such as the amount being paid, the dates of payment, whether the payment will be on a lump sum or a monthly basis, etc.

Keep all the necessary documentary evidence for future reference, including a copy of the letter. This is especially helpful in cases where a debt collection company contacts you for the same debt again in the future.

7. Pay the amount and close the deal

Once you have reviewed and verified the agreement, it is time to pay the settlement amount. Once the payment has been made, from then on, you will no longer be responsible for the debt.

Can I negotiate my debts with my creditors?

Yes, you can. But before you do, you should thoroughly research the present situation of your debt and the amount of money you can manage to bring in.

Be realistic in your approach to repayment. Even though you wishfully think of a particular payment plan, somehow, your financial situation might not be very supportive.

While negotiating with the creditors, do keep in mind that some may be trained professionals and well experienced in handling all types of debts. Pleading your case takes lots of time and effort.

Remain calm and focused while negotiating your debts.

It takes solid persistence, and a thorough follow up to get your creditor to finally agree with a settlement plan.

Is debt settlement really worth It?

The alternative to settling your debt is to be sued by your creditor, which may lead to your bankruptcy (as an individual) or winding-up (as a company).

The Debtors Act 1957 has various provisions for arrest, imprisonment, and attachment of property if the debtor fails to repay back the debt.

If the court rules in favor of your creditor, you could end up in Bankruptcy, wage garnishment, or winding-up proceedings (as a company).

Garnishee proceedings – The court may pass an order directing you to forfeit all your properties or personal belongings until you pay back the debt. If an order of wage garnishment is passed, your employer will transfer a certain portion of your monthly salary until the debt is fully settled.

Winding up proceedings– if you own a company, all your company assets will be liquidated and sold off to pay back the debt.

Check out the latest updates on winding up rules in Malaysia.

If you are declared bankrupt, the Insolvency Department will take control over your property & all your assets will be liquidated and sold off in an auction to pay back the debt.

Advantages and disadvantages of debt settlement

Debt settlement comes with its set of pros and cons:


  • Potentially reduces the total debt amount – This can result in significant savings, making it easier for you to pay off your debts.
  • Can accelerate the path to debt freedom – You can resolve your debts more quickly, providing you with a sense of financial relief and a shorter path to becoming debt-free.


  • May negatively impact your credit score – A significant drawback is its potential to harm your credit score because your credit report will indicate that the debt was settled for less than originally owed.
  • Could lead to additional fees or taxes on forgiven debt – This means you could be required to pay income tax on the amount of debt forgiven, and additional service fees which can create an unexpected financial burden.

Alternatives to debt settlement

In Malaysia, there are several alternatives to debt settlement that can help you manage and repay your debts more effectively. These include:

  • Debt consolidation: A debt consolidation loan allows you to pay off all your current debts and loans with a single loan, making it easier to manage your repayments.
  • Debt management plans: A DMP typically involves making regular payments to the credit counselling agency, which then distributes the funds to your creditors.
  • Bankruptcy: This is a legal process that offers relief from certain types of debts but has significant consequences, such as a negative impact on your credit score and potential legal fees.
  • DIY debt negotiation: If you’re willing to negotiate with your creditors yourself, you could save money and possibly limit the damage to your credit.

To do this, you’ll need to stop paying your creditors and put money into a savings account managed by the debt settlement company for the amount you’ll offer.

However, self-negotiations may not be easy when you are not aware of the various laws and processes involved. It is, therefore advisable to consult a debt recovery professional/organisation to make the process smoother.

Consult with a credit counselling agency to help you determine the best course of action for your specific financial situation.

Managing expectations and long-term financial health

Remember, the journey to financial freedom is not just about settling debts but also about learning and adopting healthier financial habits for life.

In navigating the path of debt settlement, managing expectations and focusing on long-term financial health is crucial to building a sustainable financial future.

  • Realistic expectations: Understand that not all negotiations will result in the desired outcome. Be prepared for various scenarios.
  • Impact assessment: Consider the long-term effects of debt settlement on your credit score and financial stability.
  • Future financial planning: Use this experience as a learning opportunity to better manage finances in the future.
  • Post-debt settlement, it’s essential to lay the groundwork for a sustainable financial future.
  • Budgeting and saving: Develop a realistic budget that includes savings for emergencies.
  • Credit repair: Work on rebuilding your credit score through responsible credit use and timely payments.
  • Financial education: Continuously educate yourself on financial management and seek professional advice when needed.


How does debt settlement affect credit scores?

Debt settlement can potentially harm credit scores, particularly in the short run. When you settle a debt for less than the full amount, it often leads to a note on your credit report, signalling that the debt was resolved for less than the initially owed sum.

Are debt settlement companies trustworthy?

While numerous companies have good reputations, it’s crucial to conduct thorough research and opt for accredited firms with a proven history of success and transparent fee structures.

How long does debt settlement take?

The duration varies, influenced by factors such as the debt amount, the individual’s financial situation, and the creditor’s willingness to engage in negotiations.

What are the costs involved in debt settlement?

Typically, debt settlement firms impose charges for their services, which can either be a percentage of the total debt settled or a fixed fee. It is crucial to grasp the cost structure thoroughly before committing to a debt settlement arrangement.

Can I negotiate debt settlement on my own?

Yes, you can negotiate debt settlement on your own. However, it’s worth noting that professional debt settlement companies typically possess greater expertise and negotiation skills, potentially yielding more favourable outcomes.

What happens if creditors don’t agree to settle?

If that is the case, it may be necessary to consider alternative debt relief avenues, such as debt consolidation, credit counselling, or, in certain situations, the possibility of bankruptcy.

Is debt settlement better than bankruptcy?

It depends on your financial situation. Debt settlement may result in a milder impact on your credit and financial prospects, although it might take a longer period to reach a resolution. In contrast, bankruptcy offers a quicker solution but carries more negative consequences.

What should I know before starting debt settlement?

It’s crucial to have a clear understanding of your financial situation, including your total debt and available resources. Research the potential impact on your credit score and evaluate the trustworthiness of the debt settlement company you plan to engage, based on your decision on your financial objectives.


Debt settlement and negotiating with creditors present a viable path to overcoming debt challenges.

Having a huge debt might feel overwhelming for anyone. The faster you pay off your debt, the better. But it requires a strategic approach, an understanding of alternatives, and careful consideration of each step.

Among all the negotiation strategies listed above, it is advisable to choose one which suits your financial status and your ability to repay.

By using effective negotiation strategies and being aware of other debt relief options, individuals can navigate their way to a more stable financial future.

Explore comprehensive debt negotiation solutions at Recover Debt.