Debt Settlement Negotiations: A Guide To DIY (2024)

If you’ve dug yourself into a financial hole, you may think about seeking help from a debt settlement company so you can say goodbye to your credit card bills or other debts.

However, consumer protection experts advise that asking a debt settlement company to negotiate your debt settlement can be risky. Unfortunately, some debt settlement companies may overpromise and underdeliver, perhaps leaving you in the same financial hole you’re trying to escape.

As an alternative, you can settle the debt on your own. In fact, DIY debt settlement may yield better results than relying on a debt settlement company. In part, that’s because professional debt settlement may be the costliest, least effective way to wipe out debt.

The Basics of Debt Settlement

Debt settlement involves negotiating with creditors to significantly reduce the amount of money you owe. Unlike the less dramatic forms of achieving debt relief, like debt consolidation or a debt management plan, with debt settlement, you repay only a portion of the principal you owe.

Let’s say, for instance, that you’re overdue on $5,000 you owe to one credit card issuer and $5,000 you owe to another credit card issuer. In order to get at least some of their money, the card issuers then decide to accept a lump-sum payment representing 50% of what you owe. So, instead of possibly not getting a penny from you, each creditor receives a lump-sum payment of $2,500.

Benefits of DIY Debt Settlement

The primary benefits of pursuing a do-it-yourself debt settlement revolve around cost. A DIY settlement avoids the fees you might pay to a professional debt settlement company.

A debt settlement company may charge fees totaling 15% to 25% of the settled amount. So, if you’re settling a $10,000 debt for $5,000, you could be hit with a fee as high as $1,250 or even more.

If you choose to negotiate a DIY debt settlement, you don’t relinquish your personal control over the timing of the process.

Downsides of DIY Debt Settlement

Regardless of whether you take on the task yourself or reach out to a debt settlement company, you may face a tax burden if you do reach a settlement. If at least $600 in debt is forgiven, you’ll likely pay income taxes on the forgiven amount.

Another downside to either DIY or professional debt settlement is that your credit score will take a dive, and the settlement will remain on your credit report for seven years.

And don’t forget that, if you decide to DIY, you’ll be on your own. In other words, you won’t have a debt settlement professional or anyone else to negotiate on your behalf.

The Negotiating Process

Here are seven steps you can take when you head down the DIY road of debt settlement.

1. Dig into your debts. Before doing anything else, assess your debts. How much do you owe? Who are the creditors? Is it possible to pay off the debts without hammering out a settlement agreement? Or would it be impossible to erase the debts without getting a break on the amount you owe?

2. Do your homework. Go online to find out how the creditors (or the debt collectors, if the creditors are no longer handling the debt) handle debt settlement. If you can’t locate the information online, call your creditors and ask how they deal with debt settlement. Keep in mind that not all creditors will agree to a debt settlement.

3. Stash some cash. Telling the creditors that you’ve got money saved up to settle the debt may give you an advantage in negotiating with them. This is because most will want a lump-sum payment, although some may be okay with dividing the dollar amount into monthly payments.

4. Get ready to negotiate. Once you’ve done your research and put aside some cash, it’s time to determine what your settlement offer will be. Typically, a creditor will agree to accept 40% to 50% of the debt you owe, although it could be as much as 80%, depending on whether you’re dealing with a debt collector or the original creditor. In either case, your first lump-sum offer should be well below the 40% to 50% range to provide some room for negotiation.

5. Contact the creditor. With your offer in hand, call the creditor. Ask for a manager or for the creditor’s “financial relief” department. You may need to call several times until you end up speaking to someone sympathetic to your situation.

6. Put it in writing. Once you and the creditor have agreed to a debt settlement, be sure to get the details in writing. This will help protect you in case problems come up later.

7. Pay the money. Now that you’ve got the agreement in writing, you must stick to the agreement. This means making a timely payment (or timely payments if you’ve worked out a longer-term plan) and paying every penny you’ve agreed to pay.

How to Negotiate With Creditors

When you’re negotiating with a creditor, try to settle your debt for 50% or less, which is a realistic goal based on creditors’ history with debt settlement. If you owe $3,000, shoot for a settlement of up to $1,500. However, you will start your negotiations by offering to pay an amount significantly less than 50%, in order to give you and the creditor room to negotiate.

Be sure to let the creditor know that you’ve set aside some money to make payments, whether it’s a lump-sum payment or a payment plan. This may give you an edge in your negotiations. If you do enter a payment plan, ask whether the creditor will lower the interest rate on the debt to ease your financial burden. During your negotiations, maintain a written record of all your communication with a creditor. Last but not least, keep your cool and be honest. Being emotional and untruthful won’t help your cause.

Keep in mind that most creditors will not settle a debt unless you’re seriously behind on making payments. Furthermore, if you’re negotiating with the original creditor, they may insist that you pay as much as 80% of your overdue debt.

How to Negotiate With Debt Collectors

In some cases, a creditor may have turned your debt over to a debt collector. Debt collectors make money by collecting past-due debts that originated with a creditor, such as a credit card company.

When dealing with debt collectors, be patient. It may take several attempts to get the type of settlement you’re comfortable with. Resist pressure to agree to a settlement that’s not in your best interest. Also, ask about whether the debt collector is willing to settle the debt through a payment plan rather than all at once, with one lump-sum payment.

Bottom Line

DIY debt settlement negotiations almost certainly will consume a fair amount of your time and energy, and it could take a while to reach an agreement. In the end, though, all of your work may be worth it—especially if you’re able to position yourself for a better financial future.

Frequently Asked Questions