Will Creditors Settle for Less? How to Negotiate Debt Settlement on Your Own

When you fall behind on your debt payments, it can be hard to handle. Collection calls start coming in, and you worry that your credit score will suffer. But in some cases, you may be able to settle your debts for less than the full amount you owe through a process called debt settlement.

Debt settlement involves negotiating directly with creditors or collection agencies to pay a portion of what you owe in exchange for the account being marked “paid in full.” It can completely wipe out or substantially reduce financial obligations that have become unmanageable.

I’ll explain how debt settlement works, when it makes sense to negotiate on your own versus using a debt settlement company, and provide tips to improve your chances of getting creditors to settle for less.

How Does Debt Settlement Work?

With debt settlement, you pay off your debt for less than the full amount. Say you owe $10,000 on several credit cards and haven’t been paying them on time. Your creditors may agree to take a lump sum payment of $4,000 and think the account is settled if you can reach a settlement.

Debt settlement will only work if you can get your creditors to agree to a lower amount that you have to pay back. Success depends on several factors:

• Type of debt: It’s usually easiest to get rid of credit card debt. You can also talk about medical bills and private student loans, but you can’t settle federal student loans for less.

• Missed payments You typically need to be several months past due before a creditor will consider settling. They want to see you’re experiencing financial hardship

• Ability to pay: Creditors look for lump sum payments, so having cash saved ups the odds of an approved settlement.

• Persistence It often takes multiple calls and letters to get an acceptable offer. You have to negotiate firmly and calmly

Debt settlement often makes the most sense when you’ve fallen far behind on unsecured debts like credit cards and personal loans. Settling can provide a fresh start when you have no realistic way to pay the full balances.

DIY Debt Settlement vs. Debt Settlement Companies

You have two options for pursuing debt settlement:

1. Negotiate directly with creditors yourself (DIY).

2. Hire a debt settlement company to negotiate on your behalf.

DIY settlement lets you get started right away by contacting creditors about your financial situation. You won’t pay any fees, so all money goes toward paying down debt.

The DIY approach does require time and persistence to settle each account. You must be comfortable negotiating firmly and explaining the hardship that makes it impossible to repay as originally agreed.

Debt settlement companies charge fees but handle all negotiations. The process takes about 3 years:

• You pay enrollment and monthly service fees.
• Make monthly deposits to an escrow account.
• Once sufficient funds accumulate, the company approaches creditors with lump sum settlement offers.

Expect to pay 15% to 25% of the debt amount in fees. On a $10,000 debt, fees could total $1,500 to $2,500.

Below, I’ll go into more detail on how to negotiate debt settlements yourself and provide tips to increase your chances of success.

How to Negotiate Debt Settlement on Your Own

Taking the DIY approach to settling debt takes determination, organization, and strong negotiation skills. Follow these steps:

1. Review Debts and Hardship

• Make a list of all unsecured debts, including the creditor name, account number, balance owed, due date, and number of months past due.

• Outline details on the circumstances that led to your inability to make payments. Focus on relevant facts like job loss, reduced income, high medical bills, etc.

• Creditors want to hear about true financial hardship. But avoid sharing unnecessary personal details.

2. Determine Settlement Eligibility

• Debt settlement works best for accounts at least 90 days past due. The further behind you are, the more willing the creditor may be to settle.

• Federal student loans and secured debts like auto loans or mortgages don’t qualify. Focus on credit cards, personal loans, medical bills and similar unsecured obligations.

• Make sure you have funds available, either in savings or access to extra income, to put toward settlement offers. Lump sum payments give you the most leverage.

3. Start with Low Offers

• A good opening offer is 30% to 40% of the total you owe on an account. See what the creditor counters with before increasing the amount.

• Don’t agree to pay more than you can realistically afford just to seal the deal. Another missed payment could put the settlement in jeopardy.

• If the creditor rejects an offer without making a counterproposal, follow up in a week or two with a slightly improved offer.

4. Get Agreements in Writing

• Once a creditor verbally agrees to a settlement offer, get written confirmation before sending payment.

• The letter should state they will consider the debt paid in full once they receive the agreed-upon payment by a specified date.

• If the creditor won’t put it in writing, you may need to start negotiations over. A verbal promise isn’t binding.

5. Pay and Monitor Credit Reports

• It’s critical to make the lump sum payment by the agreed-upon deadline after a settlement is reached. The deal could get revoked for a late payment.

• Also, check your credit reports to ensure the account shows as settled or paid in full for less than the balance. Dispute any errors in how it’s reported.

Tips to Increase Chances of Successful Debt Settlement

Here are some final tips to boost your odds of getting creditors to agree to debt settlement:

• Stay organized. Keep detailed records of all calls, letters, offers, and agreements. You may need to reference past communications.

• Try different approaches. If you hit a roadblock with one representative, call back and talk to someone new. Or ask to speak with a supervisor.

• Follow up consistently. Don’t get discouraged if your first few offers are rejected. Politely continue contacting the creditor every couple weeks with an improved proposal.

• Consider alternatives. If you aren’t making progress settling directly, look into options like debt management plans or credit counseling as an alternative path to relief.

• Focus on accounts with most savings. If you owe money to multiple creditors, start with the largest balances where settling could make the biggest impact.

The bottom line is that DIY debt settlement is possible if you have the time, organizational skills, and persistence required. Just recognize it can be a lengthy process requiring compromise to find agreements that work for both sides.