You should think twice before settling your debt!

Dear Debt Adviser,
I would like to pay off my debts, but can only pay about 55 percent of each debt. Currently, I have about $37,000 in debt that is in collections. I want to settle, but I want the debts stated as paid in full and no balance on my credit report, and I need to negotiate this amount. The collectors are nasty on the phone. I would like to write letters instead. Do you have any special wording that I can write to help me achieve this goal? Have you seen this strategy work before? -- Michelle

Dear Michelle,
Let me offer an alternative point of view. If I went into a restaurant and ordered a meal, then after eating it offered to pay the restaurant 55 cents on the dollar, I'll bet they'd get nasty, too. The same reasoning applies here.

You've done a great job accumulating nearly $19,000, but I'd much rather see you use that money to buy yourself the time to accumulate the rest and pay your tab in full.

Collection agencies settle debts all the time, so yes, I have seen requests for settlement work. But another thing to keep in mind is that when a portion of your debt is forgiven -- in your case, 45 percent of the debt if you are successful -- the amount forgiven is considered income by the IRS.

That means you will have to pay taxes to the IRS on $16,650 if the collectors accept your offer of paying 55 percent of the total $37,000 you owe. Plus, adding more than $16,000 income to your existing income may push you into a higher tax bracket.

I'd rather see you go to a consumer credit counseling service and work out a full repayment plan with your creditors over time. There are several advantages to this approach.

First, working out a repayment plan will keep you from having to pay the taxes to the IRS. This is important because if you owe money to the IRS, the debt is normally not dischargeable in a bankruptcy.

Second, a good counseling service will give you a financial analysis that will help you understand how you got in debt and how to avoid it in the future. They'll also help you construct a spending and saving plan you can live with that also allows you to pay all debts in full.

Finally, by working out a full repayment plan, you'll have earned yourself some serious self-respect for accomplishing something difficult.

Now, you may decide it just isn't in the cards to use a counseling agency to make good on the whole debt in the next four to five years. If so, here's a suggestion for how to word your letter to the collectors requesting a settlement. This will get you started, although it may require some customization.

Be sure you send the letters certified mail with a return receipt request. If you do not hear back from the collectors by the date you included in the letter, be prepared to follow up to ensure the letter was received.

If you need help finding a good credit counseling service, look for one that is nonprofit and accredited by the International Organization for Standardization, or ISO, or the Council on Accreditation, or COA. The best agencies will counsel you for free.

Finally, if you have any problems when talking to a collector on the phone, get his or her name and ask to speak to a supervisor. You do not have to listen to rudeness when you are trying to do your best to pay what you owe.

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of "Credit Repair Kit for Dummies." Visit MMI for additional debt advice or to ask a question of the Debt Adviser go to the "Ask the Experts" page and select "debt" as the topic.