How to Negotiate Debt Settlement on Your Own

Negotiating a debt settlement on your own is not easy, but it can save you time and money compared with hiring a debt settlement company.

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Sean Pyles
Senior Writer | Personal finance, debt

Sean Pyles leads podcasting at NerdWallet as the producer and host of NerdWallet's "Smart Money" podcast. On "Smart Money," Sean talks with Nerds across the NerdWallet Content team to answer listeners' personal finance questions. With a focus on thoughtful and actionable money advice, Sean provides real-world guidance that can help consumers better their financial lives. Beyond answering listeners' money questions on "Smart Money," Sean also interviews guests outside of NerdWallet and produces special segments to explore topics like the racial wealth gap, how to start investing and the history of student loans.

Before Sean lead podcasting at NerdWallet, he covered topics related to consumer debt. His work has appeared in USA Today, The New York Times and elsewhere. When he's not writing about personal finance, Sean can be found digging around his garden, going for runs and taking his dog for long walks. He is based in Ocean Shores, Washington.

Courtney Neidel is an assigning editor for the core personal finance team at NerdWallet. She joined NerdWallet in 2014 and spent six years writing about shopping, budgeting and money-saving strategies before being promoted to editor. Courtney has been interviewed as a retail authority by "Good Morning America," Cheddar and CBSN. Her prior experience includes freelance writing for California newspapers.

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.

The strategy works best for debts that are already delinquent. Creditors, seeing missed payments stacking up, may be open to a settlement because partial payment is better than no payment at all.

But because you must continue to miss payments while negotiating, damage to your credit stacks up, and there is no guarantee that you’ll end up with a deal.

There are better ways to handle your debt than DIY debt settlement.

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

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DIY debt settlement vs. debt settlement companies

Time and cost are the main distinctions between debt settlement through a company and doing it yourself. Debt settlement can take as long as three to four years, according to the National Foundation for Credit Counseling.

"Some debt settlement plans can take a few years to complete while some of us can pull together funds to completely settle our debts in as little as six months of falling late with payments, " said debt settlement coach Michael Bovee.

With a debt settlement company, you’ll likely pay a fee of 15% to 25% of the enrolled debt once you agree to a negotiated settlement and make at least one payment to the creditor from an account set up for this purpose, according to InCharge Debt Solutions.

In addition, you’ll likely have to pay setup and monthly fees associated with the payment account. If you pay $9 a month to manage the account plus a setup fee of $9, you could pay upward of $330 over 36 months on top of the fee taken for each settled debt.

Debt settlement companies also can have inconsistent success rates. In 2013, the CFPB took legal action against one company, American Debt Settlement Solutions, saying it failed to settle any debt for 89% of its clients. The Florida-based company agreed to effectively shut down its operations, according to a court order.

While there are no guaranteed results with debt settlement — through a company or on your own — you’ll at least save yourself time and fees if you go it on your own.

>>How to pay off your debt: A three-step strategy

How to do a DIY 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.

Step 1: Determine if you’re a good candidate

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

Have you considered bankruptcy or credit counseling ? Both can resolve debt with less risk, faster recovery and more reliable results than debt settlement.

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. If you believe you can, you probably can. And it’s a skill you can learn.

Step 2: Know your terms

You need to negotiate two things: how much you can pay and how it’ll be reported on your credit reports.

While you’re technically working to settle your debt as a percentage of what you owed, also think about how much you can pay as a concrete dollar amount. Comb through your budget and determine what that figure is. Note that you may have to pay taxes on the portion of debt that's forgiven if the amount is $600 or more.

You may be able to salvage your credit by clarifying how the settled debt is noted on your credit reports.

Settled debts are generally marked as “Settled” or “Paid Settled,” which doesn’t look great on credit reports. Instead, you'll try to get your creditor to mark the settled account “Paid as Agreed” to minimize the damage.

Step 3: Make the call

Dealing with your creditor will require 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, try calling again to get someone more accommodating. Try asking for a manager if you’re not making any 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 try to work toward a middle ground. If you know you can only pay 50% of your original debt, try offering 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. If you’re not making any progress, it may be time to reconsider other debt relief options, like Chapter 7 bankruptcy or a debt management plan .

Step 4: Finalize the 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.

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Sean Pyles is the executive producer and host of NerdWallet's Smart Money podcast. His writing has appeared in The New York Times, USA Today and elsewhere. See full bio.

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