How to Negotiate Debt Settlement on Your Own

With do-it-yourself debt settlement, you negotiate directly with your creditors in an effort to settle your debt for less than you originally owed.

This strategy works best for debts that are already delinquent, or not paid by their due date. That’s because as creditors start to see missed payments stack up, they may be more open to a settlement offer, since partial payment is better than no payment at all.

Here’s how DIY debt settlement compares to using a debt settlement company and how to successfully negotiate with a creditor on your own.

» MORE: How does debt settlement work?

Should you settle debts on your own or use a debt settlement company?

Time and cost are the main differences between settling debts yourself and hiring a third-party debt settlement company.

If you’re going the DIY route, you can get started immediately by calling your creditors. (Get negotiation tips below.) You also won’t pay fees if you negotiate debts on your own.

If you’re working with a debt settlement company, you’ll need to undergo a more time-consuming process that includes saving money in an escrow account that can eventually be used for a lump-sum settlement offer. This takes three to four years on average.

You’ll also pay a fee of 15% to 25% of the enrolled debt. For example, if you have $10,000 in debt, and the debt settlement company charges a 25% fee, you’ll pay $2,500 once that debt is successfully settled. This is in addition to paying the settled amount to your creditor.

Settlement companies also charge small setup and monthly fees that add up. If you pay a $9 setup fee, plus a $9 monthly fee, you could pay upward of $330 over three years.

That said, debt settlement companies do offer some advantages. If negotiating makes you nervous, then working with an experienced debt settlement company may be helpful, since they talk directly with creditors for you. They also look at your budget and help you build a plan to save for a settlement offer.

How to negotiate debt settlement

If you decide to negotiate with a creditor on your own, navigating the process takes some savvy and determination. Here’s a step-by-step breakdown:

1. Determine if you’re a good candidate for debt settlement

2. Know the terms you want from settlement

3. Make the call to your creditor

4. Finalize the settlement deal

5. Make a plan to rebuild your credit

1. Determine if you’re a good candidate for debt settlement

Answer these questions to decide whether DIY debt settlement is a good option:

• Are your debts already delinquent? Many creditors will not consider settlement until your debts are at least 90 days delinquent. Typically, after 120 to 180 days of delinquency, the original creditor will sell your debt to a third-party debt collector.

• Do you have the money to settle? Some creditors will want a lump-sum payment, while others will accept payment plans. Regardless, you need to have the cash to back up any settlement agreement.

• Do you believe in your ability to negotiate? Confidence is key to DIY debt settlement. You’ll want to project competence and determination when speaking with creditors.

2. Know the terms you want from settlement

There are two things to keep in mind as you prepare to negotiate a settlement offer: how much you can pay to your creditor and how it’ll be reported on your credit reports.

While you’re technically working to settle a percentage of the debt you owe, also think about the actual amount you can pay. Comb through your budget and determine a realistic amount. Note that you may have to pay taxes on the portion of debt that's forgiven if the amount is $600 or more.

Debt settlement typically takes a big toll on your credit, but you may be able to salvage your score by clarifying how the settled debt is noted on your credit reports.

Settled debts are generally marked as “settled” or “paid in full for less than the full balance,” which doesn’t look great on credit reports. Instead, try to get your creditor to mark the settled account “paid as agreed” to minimize the damage.

3. Make the call to your creditor

Dealing with your creditor requires persistence and persuasion.

You may be able to resolve the settlement in one go, or it might take a few calls to find an agreement that works for both you and your creditor. If you don’t have luck with one representative, call again — you may get someone more accommodating. Ask for a manager if you don't make progress with frontline phone representatives.

Concisely portraying the financial hardship that made you unable to pay your bills can make the creditor more sympathetic to your case.

Start by lowballing, and work toward a middle ground. If you know you can only pay 50% of your original debt, offer around 30%. Avoid agreeing to pay an amount you can’t afford.

Success can vary depending on the creditor. Some are open to settling, others aren’t.

4. Finalize the settlement deal

Before making any payment, get the terms of the settlement and credit reporting in writing from your creditor.

A written agreement holds both parties accountable. They have to honor the agreement, but if you miss a payment, the creditor can retract the settlement agreement, and you’ll be back where you started.

5. Make a plan to rebuild your credit

Since debt settlement can majorly damage your credit, it’s important to make a plan for how to rebuild your score. This includes prioritizing any upcoming bills or payments — to avoid late payments being reported to the credit bureaus — and reducing the overall amount of debt you owe by keeping credit card balances low.