Email FacebookTwitterMenu burgerClose thin

Debt Settlement

How to Negotiate a Debt Settlement On Your Own

If you’re drowning in credit card debt, you may think bankruptcy is the only way to dig yourself out. While filing bankruptcy can give you a clean financial slate, it can also cause serious damage to your credit that may take years to repair. Settling your debts is an easier way to get out of the hole.

Find out now: Is it better to buy or rent?

There are lots of companies that advertise debt settlement services but these typically come with a hefty premium and you’re not automatically guaranteed results. The easier and cheaper way to settle your debts is to deal with your creditors yourself. If you’re not sure how to go about initiating a settlement, here are a few helpful tips to guide you through the process.

How Debt Settlement Works

When you settle a debt, it means the creditor agrees to accept less than the full balance owed. You either make one lump sum payment or several smaller payments and the remaining balance is forgiven. Depending on the creditor and how much you owe, you may be able to settle for anywhere from 30% to 70% of the outstanding balance of your debt.

Typically, a creditor will only consider a settlement when an account is delinquent, but you should keep in mind that they’re not required to accept your offer. Letting an account go unpaid won’t necessarily improve your odds of getting a settlement and the missed payments will be reported on your credit. If more than $599 in debt is forgiven, you may have to report it as income on your taxes.

Debt settlement has pros and cons. Debt settlement can provide peace of mind if having debt hanging over your head is getting too stressful. Another pro is that negotiating a debt settlement generally means you’ll pay your creditors less than you owe. But there are cons as well.

For one thing, your creditors will report to the credit bureaus that your debts were settled for less than the full amount. This will be a negative item on your credit report for seven years, lowering your credit score. Another potential problem with debt settlement is that there are companies that take advantage of indebted clients by taking high fees and making debt relief promises they can’t keep. If you decide to enlist help in your credit card debt settlement negotiations, be sure to do your research and read reviews.

Related Article: Debt Consolidation

Preparing a Settlement Offer

Before you call up the credit card company, you need to decide how much you want to try to settle the debt for. There’s no set formula for calculating how much to offer your creditor. Ultimately, it depends on what you owe, how much cash you have to work with and how long the account’s been delinquent.

It’s best to only offer what you can reasonably afford to pay. But you need to make sure the settlement is fair. The credit card company’s goal is to collect as much money as possible and they could reject an offer that they consider to be too low.

You’ll also need to decide whether you’re comfortable paying everything all at once or if it’s better to break the payments up. It’s also a good idea to prepare a counteroffer, since it’s likely that the credit card company will try to get the most favorable deal possible.

Contacting the Creditor

Debt Settlement

If you’re ready to make a debt settlement offer, you need to make sure you’re contacting the right creditor. When you miss a payment on your credit card bill, the account is usually sent to an in-house collections department. Once your account’s been delinquent for a certain period of time, the credit card company may decide to assign it to an outside debt collection agency.

If the account has been assigned to the collection agency, then you may still be able to negotiate with the credit card company directly. If the credit card company sold your account, then you’re stuck dealing with the debt collector. Either way, you need to know who owns the account before you try to make an offer.

When you’re ready to make an offer, you need to decide if you want to handle the negotiations over the phone or in writing. Calling the creditor is a faster way to get things started but you’ll want to make sure you keep a record of your conversations.

Related Article: The Worst Ways to Deal With a Bill Collector

Finalizing an Agreement

Debt Settlement

If the credit card company agrees to a settlement, it’s a good idea to get everything in writing before you hand over any cash. The agreement should spell out what amount was owed, what you’re settling the account for and how the settlement will be reported on your credit. Typically, the account will show up as “Settled.”

When you’re ready to pay up, ask the credit card company if they’ll accept a money order or wire transfer. Avoid giving a creditor direct access to your bank account and make sure you get a receipt when you send the money. It’s also a good idea to follow up with the creditor to make sure the payment was received and properly credited to your account.

Dealing with a creditor may not be an ideal way to spend an afternoon, but sacrificing a few hours of your time can translate to big savings. Persistence and a thick skin are key to getting the best deal possible when you’re trying to negotiate a debt settlement.

Update: Have more financial questions? SmartAsset can help. So many people reached out to us looking for tax and long-term financial planning help, we started our own matching service to help you find a financial advisor. The SmartAdvisor matching tool can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo credit: Debt Settlement Companies, ©iStock/miki1991, ©iStock/Tashi-Delek