Have you ever felt in over your head with debt? According to a 2024 study, the average level of personal debt, not including mortgages, is over $22,000. Maybe you’ve been hit with unexpected medical bills or accrued credit card debt over time. If you’re struggling to keep up with your monthly payments, you might be considering debt settlement.
Negotiating a debt settlement is a strategy where you work with your creditors to pay less than the amount you actually owe. This can be a great way to get out of debt faster and for less money, but it’s important to understand the process before you start. Below, we walk through how to negotiate a debt settlement step-by-step.
Debt settlement is a strategy where you negotiate with your creditors to pay a lump sum less than your total debt balance. It’s different from debt consolidation, which involves combining multiple debts into a single loan, and debt management, which typically involves a credit counseling agency helping you create a budget and manage your payments.
Not all types of debt are eligible for settlement, but unsecured debts like credit cards and medical bills are good candidates. Government-funded loans, like student loans or federal taxes, aren’t typically eligible for settlement.
If you choose to settle your debt, you can learn how to negotiate debt settlement on your own or work with a debt settlement company. A debt settlement company can help you navigate the process and negotiate with your creditors on your behalf. If you go this route, be sure you know the right questions to ask a debt settlement company before working with them.
Before learning how to negotiate debt settlement, first weigh the pros and cons to determine if this path to credit card debt forgiveness is right for you.
Debt settlement can offer several advantages, such as:
However, there are also potential drawbacks to consider:
If you’ve decided you want to proceed with debt settlement, there are a few steps to follow. Here’s how to negotiate credit card debt settlement yourself:
Before you start negotiating, it’s crucial to have a clear understanding of your debt. Review your credit reports to confirm the accuracy of the information, including the amounts owed for each debt and interest rates.
You can obtain one free credit report from all three major credit bureaus (Equifax®, Experian®, and TransUnion®) per year at AnnualCreditReport.com. You can also request a credit report directly from Equifax, Experian, or TransUnion, but this typically involves a fee.
Next, determine how much you can realistically afford to pay. Consider your monthly budget and current finances. Then, you can determine the settlement offer you want to propose to your creditors.
When negotiating a debt settlement, you have two primary options for structuring your offer: a lump sum payment or a payment plan.
Whatever route you choose, determine the percentage of your debt you can feasibly pay and the maximum you can afford.
If you’re negotiating a debt settlement on your own, you’ll need to contact your creditors directly. Be polite and professional in your communication, and have a plan for how you’ll present your case.
To start, refer to the percentage of your debt that you determined you could afford in the previous step and come up with three different offers. First, present your creditor with the lowest offer, typically 25–30% of the balance. While this is likely to be rejected, beginning with this common baseline is a good place to start. Continue with your other offers while remaining within the maximum of what you can afford.
If your creditor initially rejects your offer, don’t lose hope. Stay calm and persistent, and be prepared to present your counteroffers.
Once you and your creditor have reached an agreement, get it in writing. A written settlement letter should outline the terms of the deal, including the amount you’ll pay, the payment schedule, and any other relevant details.
Make your payments on time (this can also help you improve your credit score) and keep a record of all transactions. This will help you avoid any misunderstandings or disputes with your creditors.
To ensure your payments are secure, consider the following:
Always maintain a record of all payments, including dates, amounts, payment methods, and any confirmation numbers or receipts. Ask your creditor to provide written confirmation of each payment received.
While debt settlement is a great option for many, be sure to explore other alternatives that may be better suited to your specific financial situation. Here are some alternatives to consider:
Negotiating a debt settlement can feel complex, but with the right planning and execution, it’s possible to achieve significant debt relief. By understanding the pros and cons, following a step-by-step approach, and exploring alternative options, you can make informed decisions about your financial future. Before you take that step, get your free credit report card to see where you stand.