Debt Settlement Negotiation on Your Own: A Step-By-Step Guide
9 MIN READ
Published January 23, 2024 | Updated January 30, 2024
If you have maxed out credit cards and are finding it difficult to make minimum payments or have missed payments, consider reaching out to your creditors to see if you can settle your debts. Debt settlement can relieve you of some of your financial obligations, but lenders aren’t obliged to accept your offer.
You can either hire someone to negotiate with your lenders or learn how to negotiate debt settlement on your own. Follow the step-by-step process we’ve listed in this guide to get started.
How To Negotiate a Debt Settlement on Your Own
Negotiating with a debt collector requires some determination and confidence. Follow this step-by-step guide to negotiate debt settlement on your own to learn more about how the process works.
Determine if Debt Settlement Is Right for You
Start by taking the time to determine if DIY debt settlement is the right option for you. The key to negotiating debts on your own is confidence. If you believe you have the ability to negotiate and can hold your own against a debt collector or creditor, it may be a good option to consider.
Most lenders will only consider a settlement if you are already delinquent. If your account isn’t three to six months past due, it’s best to consider other debt-relief options. You’ll also have to consider if you have the means to make the lump-sum payment as a part of the settlement.
Figure Out How Much To Save for a Settlement
“Typically, right around 10%-15% of your monthly after-tax take-home pay should be a reasonable amount to commit toward your settlement fund each month,” shares Brad Reichert, founder and managing director of Reichert Asset Management LLC. “While it’s a modest amount of your net income each month, it should be sufficient enough to show your lenders that you are serious about paying off your debt with a settlement that works for both you and your lender,” Reichert believes.
Understand Your Rights As a Borrower
Before you negotiate with lenders and debt collectors, it’s also important to know what they can and can’t do as per the Fair Debt Collection Practices Act (FDCPA). For example, debt collectors can’t harass you, use threatening or obscene language, or use unethical collection tactics.
Know Your Settlement Terms
When determining how to negotiate debt settlement on your own, you’ll have to think about how much you can and are willing to offer as a settlement. For example, you may want to settle your debts for 50% of what you originally owed. You can get debt forgiveness for the remaining amount if the lender agrees.
Take a good look at your budget and think about a dollar amount you can reasonably put aside for the settlement. Keep in mind that you’ll also owe taxes to the IRS on the forgiven amount. You may also be able to negotiate how the settled debt is reported to the credit bureaus.
Usually, settled debts are marked as “Paid Settled” or “Settled” on credit reports, which clearly indicates to a future potential lender that you worked out an agreement in compromise for paying the full amount. However, you can try to negotiate with your lender(s) to mark a settled debt as “Paid as Agreed” to minimize the credit damage.
Call Your Lenders
The next step in the process is to call your lenders to negotiate. You can also send a debt settlement letter if you prefer. Keep in mind that it may take multiple phone calls or letters to reach an agreement that works for both parties involved.
Be clear and truthful about your financial situation and why you’re unable to pay the debt in full. Start with a lowball offer and keep in mind the amount you can realistically pay. For example, if you can pay 50% of your original debt, start with an offer of 20% and work your way up.
Finalize the Deal in Writing
Once you come to an agreement, get it in writing. It’s a good practice to keep notes of all your communications with a lender or a collection agency, including names, telephone numbers (including extensions), and the dates and times you spoke with each representative. The last step in the process is to have a formal agreement in writing so there aren’t any problems later.
Without a written agreement, the collection agency may contact you again to collect the same debt.
Why Negotiate a Debt Settlement Yourself?
Now that you know how to negotiate debt settlement yourself, you’ll be able to determine if it’s a good idea to pursue it on your own or hire a professional. Here are a few situations where DIY debt settlement makes sense:
- You have a clear idea of how much you want to settle for.
- You’re confident in your ability to negotiate.
- You don’t mind dealing with debt collectors.
- You want to save money.
- You are comfortable investing the time to make the required phone calls and write the necessary letters you need to work out a negotiated settlement with each lender.
- You’re aware of your rights as a borrower.
How Debt Settlement Works
Debt settlement is an agreement between a borrower and a lender for a lump-sum payment towards a debt that is significantly lower than the current outstanding balance. If the lender agrees to the settlement, and the settlement amount is paid by the borrower to the lender in full, the remaining debt is forgiven by the lender. This type of debt relief is usually suitable for those with a large amount of unsecured debt, late payments, and past-due accounts, and some regular form of monthly income.
For example, if you have $15,000 in credit card debt and are unable to clear the entire balance by using one of the other common forms of debt relief, you may be able to settle the debt for $7,000 if you can offer a lump sum payment to the credit card company or debt collector for that amount. You can negotiate on your own or hire a debt relief company to negotiate a fair settlement for you.
If you hire a debt relief company, you’ll make payments to the company each month towards the settlement. The company will put your monthly payments into a savings account, which will be used to make the lump-sum payment. Once the settlement is finalized and you’ve accumulated enough funds, the company will make the lump sum payment to settle and close your account.
Benefits of Self-Negotiating Debt Settlement
The key benefit of DIY debt settlement negotiation is that you’ll be able to save money. When you hire a debt settlement company, you’ll pay a fee of 15% to 25% of the settled amount to the company. Once you agree to a settlement, they negotiate for you. Of course, when you negotiate your settlement on your own, you can save those fees.
Another benefit is that you’ll have full control over the timing of the entire process, and you can pay off your debts when you want. If you settle your account successfully, you’ll also feel empowered with your ability to manage your debts.
DIY Debt Settlement vs. Hiring a Debt Settlement Company
When you hire a debt settlement company, you’ll have to pay up to 25% of the settled debt as a fee. This may sometimes add up if you have enrolled multiple debts with large balances. With DIY debt settlement, there are no such costs.
On the other hand, most debt settlement companies are very experienced at these kinds of negotiations and can help you settle your account for as little as 50% of what you owe. The representatives at a debt settlement firm know whom to go to and how to contact lenders effectively to get the fastest and most advantageous results in most cases.
They can speak to your lenders in the language and terminology that is commonly used in the credit and lending industry. Without that kind of experience, you may not be able to get the same results.
When deciding between the two options, consider the savings in fees against the settlement you may be able to get with the help of a debt settlement company to determine the right option.
Get a Debt Settlement To Get Out of Debt
If you have a large amount of debt and are finding it difficult to keep up with it, there are a number of strategies to reduce that burden. You can ask your lender for an affordable monthly payment plan, get a debt consolidation loan or balance transfer, enroll in a debt management plan at a nonprofit credit counseling agency, or speak to a credit counselor to determine the right debt relief option.
If you determine that debt settlement is the right option for you, take your time to learn how to negotiate a debt settlement on your own, but you should go into it knowing that lenders are not obligated to accept your offer and accept these settlements, specifically on a case-by-case basis. Once you settle your debt, practice healthy credit habits so you don’t end up with a lot of debt again.