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I spent many years as a bankruptcy attorney. It was a satisfying profession because my clients had gotten in over their heads for one reason or another (lost a job, illness, or something else) and my job was to help them get out of debt and breathe a little easier. Sometimes that meant helping them get a debt consolidation loan or file for bankruptcy, and occasionally, it meant negotiating with their creditors.

Today we are going to drill down on that last one more deeply.

The good news is that if you have substantial debt, yes, it is quite possible to negotiate with your creditors and get them to accept less than what you owe. Here is my guide on how to do so effectively and settle for less.

1. Understand your financial situation

Before reaching out to your creditors, it is important that you have a solid and thorough understanding of your financial situation. A vague idea that you have problems won’t suffice. Instead, gather all relevant documents, including:

• Account statements: Know exactly how much you owe each creditor.
• Income and expenses: Create a budget to see what you can realistically afford to pay.
• Credit report: Check for inaccuracies that might affect your negotiations.

Having this information will empower you during the negotiation process.

2. Prepare your strategy

When approaching creditors, preparation is key.

First, you need to be able to show each individual creditor that you really are underwater and that paying off all of your debts would be impossible. Given that, you are nevertheless looking to negotiate in good faith, with the proviso that you would need the creditor to settle for less than you owe.

Second, you will need a lump sum of money ready to pay off the debts. If, for example, credit card X agrees to take half of what you owe, the company will require that you pay that amount within, say, 30 days. In my experience, credit card companies will not settle and take a long-term payment plan. They will want payment soon, or immediately.

So you need some money set aside for this strategy to work. Consider applying for a hardship loan if you don’t have the cash on hand.

3. Initiate the negotiation

Once you are ready, it is time to reach out to each creditor. Here is how to do it effectively:

• Find the right person: You’ll need to speak with the appropriate representative within the company to negotiate, which could be someone in the legal department.
• Be professional and respectful: Approach the conversation with a positive attitude. This can make a significant difference in how the representative responds.
• Explain your situation and make an offer: Explain your situation and tell them you are looking to settle. Do not be afraid to ask for a significant reduction. Having done many of these negotiations, I am telling you that it is common for creditors to settle for far less than the full amount owed.

4. Play the bankruptcy card

The single strongest piece of leverage you have in your negotiation is the threat of bankruptcy. Tell them, “I would much rather pay you something than file for Chapter 7 bankruptcy. To avoid that however, I can only afford to pay you 25% (or whatever) of what I owe you.” Note: almost a half a million people filed bankruptcy this past year.

In a Chapter 7 bankruptcy, all unsecured debts are completely wiped out. Most creditors would get nothing in that case. Suddenly your 25% offer does not look so ridiculous. You may not settle for 25%, it might be 50%. That is not uncommon.

Just remember, it is the legitimate threat of a Chapter 7 bankruptcy that will get their attention.

5. Get it in writing

If you settle for less than you owe, get the settlement amount in writing. Send a follow-up letter or email summarizing the discussion and any agreements made. It is crucial to document everything for your records, so consider sending a letter via certified mail for proof of delivery.

Negotiating your debts down is not only possible, it can be a powerful way to regain control of your finances. If it works, great! And if not, bankruptcy sounds worse than it is. You can recover from it within a year or two and have good credit again.

How? Yes, a bankruptcy stays on your credit report for 10 years — but within a year or two, you can start to qualify for credit cards and auto loans again. Pay those back in a timely manner, and the bankruptcy becomes less important to potential lenders as the years pass.

Good luck!

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