Settling Your Debts On Your Own

If you feel like you’re drowning in debt, the idea of settling for less money than you owe can be appealing. You could hire a debt settlement company that will work on your behalf to negotiate settlements with your creditors. However, you may need to save up enough money to pay the creditor and the settlement company’s fee before you can settle your accounts.

As a result, working with a debt settlement company could prolong the process and cost you more money overall.

A do-it-yourself (DIY) approach may be just as effective, save you money, and let you settle your debts sooner.

Why Do Creditors Accept Settlement Offers?

With a secured loan, like a mortgage or auto loan, the lender may have a right to claim the collateral (e.g., the home or car) and won’t be as willing to settle. But there’s no collateral with unsecured loans, credit card debt, personal loans, and medical bills. Creditors can either send your accounts to collections, sue you for nonpayment, or sell the debt to a third-party debt buyer or collector.

Sending an account to collections isn’t free, as the company will have to pay operational costs for in-house collections or a fee to third-party collectors. Hiring attorneys to sue you for unpaid debts costs money as well. Even if the creditor can sell the right to collect the debt, it often won’t recover the full amount you owe.

According to a Federal Trade Commission report on the debt buying industry from 2013, debt buyers paid an average of 4.0 cents per dollar of uncollected debt. The figure may include debts that have been sold and resold multiple times, which can lower their value. Still, as a borrower, you may see why you have some negotiating power.

If you offer your original creditor more than it could potentially make from a debt buyer, it may accept your offer even if it’s for less than the full amount owed. Similarly, if you offer a debt collector more than it paid for your debt, it may be making money even if you don’t repay the debt in full.

Your 6-step DIY Debt Settlement Plan

While many creditors might agree to settle your debt for less than what you owe, there’s no guarantee that debt settlement will work. If you’re considering trying it on your own, here’s a rough guide to the steps you may want to take:

1. Assess your situation

Create a list of your past-due accounts with the creditors’ names, how much you owe, and how far behind you are on payments. You’ll need this list as the basis for your plan and to decide which accounts to tackle first.

If you think you can afford to make minimum payments or might be able to stay current on your accounts with a hardship payment plan, that might be a better option. While debt settlement can save you money, it isn’t guaranteed to work and may hurt your credit and lead to additional fees in the meantime.

2. Research your creditors

Creditors may have different policies for when they’ll accept a settlement offer and how much (or little) they’ll accept.

For example, you may need to be at least 90 days late on an account before a creditor considers settling. Or, some creditors might not settle at all, and you’ll have to wait until the debt is sold to another company.

Some creditors might also be more likely to sue you to collect an unpaid debt than others. Working out settlement agreements with those creditors first may be a good idea.

You can research online to learn about others’ experiences and inform your offer, keeping in mind that other people’s outcomes might not reflect a company’s current practices.

3. Start a settlement fund

Although you won’t have to repay the full amount, you still have to pay something if you want to settle an account. Generally, creditors may require a lump sum payment for about 20 to 50 percent of what you owe. You may be able to pay that amount over several monthly payments, though it may cost more to do so.

You might want to open a new bank account for your settlement fund, so you aren’t tempted to spend the money elsewhere and to prevent accidental overdraws during the settlement process. Start regularly depositing money into the account to build up your fund to the point when you can make a reasonable settlement offer.

It could be a good idea to store your settlement fund in an account that isn’t run by a creditor that you’re also negotiating with to keep the company from getting an insight into your financial position.

4. Make a debt settlement offer to the creditor

Once you think you have enough money saved up to settle an account, you can call your creditor and make an offer. In some cases, the creditor may have already sent you a settlement offer. You could accept the offer, or respond with a lower counteroffer.

Whether you’ve lost your job or are dealing with medical bills, share why you can only afford the settlement amount you’re offering. To avoid confusion, make sure the offer is for a specific dollar amount rather than a percentage of your balance.

If the creditor doesn't agree to settle, you may want to wait until it sells the debt and try again with the debt buyer or collection agency.

5. Review a written debt settlement agreement

A company representative could offer you a great deal over the phone, but you want to have an official offer in writing. The proposal should have your name, the creditor or debt collector’s name, and the account number. It should also have the terms of the settlement, such as the amount being paid, whether it’s paid in a lump sum or over time, and the payment due dates.

Make sure the letter clearly states that your payment will satisfy your obligation. It may say the account will be settled, paid in full, accepted as settlement in full, or something similar. Keep a copy of the letter, and any payment confirmations, in case a collection company contacts you about the debt again in the future.

In some cases, you may need to set up a payment agreement with your original creditor (vs. a debt buyer) before it sends you the settlement letter. Try to work out an arrangement to schedule your payment in the future, giving the company several business days to get the letter to you in the meantime. You could then cancel the payment if you don’t receive a letter.

6. Pay the agreed-upon settlement amount

Once you’ve come to an agreement and have reviewed a written offer, pay the settlement amount, and you won’t be responsible for the debt any longer. Then it’s time to move on to the next account.

Ways Debt Settlement Might Not Work

Settlement can save you a lot of money, but it's not a guarantee. More importantly, there are significant risks to consider.

• Your credit can take hit. Whether you choose a DIY route or work with a debt settlement company, the process could hurt your credit and open you up to the possibility of getting sued.
• You may not be delinquent enough. Creditors generally don’t agree to settle an account if you’re only a few days late. You may need to be at least 90 or more days behind on your payments before a credit card company will even consider a settlement. By that point, your late payments have likely been reported to the credit bureaus.
• It may take a long time to complete the settlement. The process could also take time, and if the original creditor doesn’t want to settle (or you don’t agree with the settlement offer), the account could be charged-off and sent or sold to collections, which could also hurt your credit.
• You may be sued. Additionally, creditors may be able to sue you for unpaid debts and get a judgment, which could lead to wage garnishments.

Alternatives Debt Solutions

Debt settlement may not be your only option if you’re having trouble paying your bills, and it may not be the best option in every case.

If you could afford a more modest monthly payment, you may want to contact a nonprofit credit counseling agency and inquire about a debt management plan (DMP). Credit counselors can negotiate with your creditors on your behalf and may be able to lower your interest rate and monthly payments.

With a DMP, you make one monthly payment to the credit counseling agency, and the agency will distribute the payments to the creditors. It could be a good option if you can afford to pay something each month and don’t want to become delinquent on your accounts.

If you don’t see any possible way for you to afford to repay the debt, filing bankruptcy might be the best route. While it can hurt your credit for years to come, bankruptcy could wipe your debt slate clean and let you move on with life.

DIY Debt Settlement

Settling debts on your own is possible, and we'll walk you through that process. But if you would like a hands-off approach to debt settlement, consider working with a debt settlement company.

Debt settlement is a financial agreement where the lender agrees to accept a lump-sum payment from the borrower to settle an outstanding debt. The payment is for a significantly lower dollar amount that what was owed, making it one of the most attractive debt-relief options available.

You can hire a debt settlement company who will negotiate with your creditor for a fee, or you can cut out the middleman and do it yourself.

Debt settlement is commonly used when the borrower can no longer afford the high interest on credit card debt, coupled with the amount owed. For example, if you owe $20,000 on a credit card that accrues 20% interest in annual percentage rate, you would owe another $4,000 in interest alone over a calendar year’s time.

The size of the debt, along with the compounded interest and late payment penalties, leads to borrowers being inundated with massive amounts of debt they can’t afford.

Negotiating a debt settlement with a creditor can, at times, knock off over half of the amount owed. Paying just 50% of a debt is the optimistic goal of every debt settlement negotiation. It’s a smart risk when you owe more than $10,000 and are delinquent on payments.

If you want to settle the debt without hiring a debt settlement company don’t be afraid to take it on! Do it yourself debt settlement is like lawn care: it’s a little work, but in the long run it can save you a lot of money.

DIY Settlement vs Debt Settlement Companies

The major difference between debt settlement companies and DIY settlement is the amount of time and money the process will take. Working with a debt settlement company can take 3-5 years to complete. Doing it yourself involves only you and the creditor when you cut out the third party. This saves you money from paying a percentage of the settlement to the third-party settlement company.

The risk is you are inexperienced and don’t have the third-party expertise. However, hiring a debt settlement company does not mean you will come away with a flattering offer. Debt settlement companies are known to have inconsistent results when it comes to helping their clients.

If you do it yourself, you negotiate the debt settlement on your terms without the cost of hiring someone who you can’t afford.

4 Steps for Successful Debt Settlement Negotiations

Step 1: Assess Your Current Financial Situation

Lay out a plan on how to tackle your financial situation. Find out who you owe, how far behind are you on the payments, and how much money you have to negotiate with. Sometimes it is better to continue on-time payments while building a large enough sum to complete the process of debt settlement.

If you are delinquent on your payments, create a separate bank account where you can set aside money to pay a one-time lump sum to your creditor or a shortened payment plan. When negotiating, you need to come to the table with at least 50% of what you owe for the creditor to seriously consider offering a debt settlement.

Step 2: Figure Out Who Your Creditors Are and Learn Your Rights

Look up the policies for your specific creditor and find out what policies they have set. The creditor has no obligation to settle with the you. If the creditor avoids debt settlement, you may have to wait until it is sold to a different collection agency for the chance to settle the amount owed.

If the creditor believes they are unlikely to receive the full payment, you have a great chance at debt settlement. The older the debt is, the better the chance you will succeed with a debt settlement offer.

Get a copy of the Fair Debt Collection Practices Act (FDCPA), which spells out what collection agencies can and can’t do to collect a debt. There are plenty of provisions that protect you from being harassed.

For example, if the collection agency is after you about an unpaid debt, there are specific times of day they can and can’t call. They can’t visit you at work. They can’t lie about your debt or the penalties you will incur for not paying. If they violate any of the rules, you can sue. First, you must know the rules of the game, so look up the FDCPA.

Step 3: Talk to Your Creditors and Set Your Terms

Know exactly how much you can afford. This is an obvious starting point, but one commonly overlooked by people too anxious to settle their debt. They jump into negotiations, get 20% knocked off their principal and start rejoicing, only to find out that’s still more than they can afford.

Determine how much a month you can pay and stick to that throughout the negotiation process. It is not unreasonable to think you can get the principal reduced by a substantial amount. Whatever amount you settle on, be sure you can comfortably afford it. Try to negotiate away the late fees that have been assessed for lack of payment. These fees are what can ultimately tank your credit score.

Step 4: Make an Agreement & Pay off Debt

Ask for a written agreement before you do anything. Read it over carefully and understand payments, due dates and penalties before you sign it.

Be patient. Collection agencies are good at intimidation. They rush debtors into a process with subtle, and sometimes not-so-subtle, threats about the consequences for not paying. Play the negotiating game at a slow pace. Make them explain everything to you in detail. If you drag the process out long enough, they may improve their offer to get something out of you. Patience definitely pays off.

After you have negotiated the agreed upon price, you will need to pay the settlement figure either in a lump sum or with a payment plan. Once you have done that, you are no longer in debt to the creditor.

Risks of DIY Debt Settlement

You may not be as great a negotiator as you thought. Debt settlement companies built their business around being able to save you money. They do not get their money without you saving yours. The creditor may low ball you, costing you thousands of dollars. It is up to you to find out what is the best option for your specific financial situation.

A drawback to debt settlement is that it stays on your credit report for seven years, discouraging any lenders (home, auto, credit card, etc.) from giving you more credit. It also damages your credit score by 75-100 points, meaning that if a lender gave you credit, they would do so at a very high interest rate. For example, a 5% car loan might cost you 18% -20% because of debt settlement. That would be thousands more you must pay for a car because you have debt settlement on your credit report.

DIY Debt Settlement Alternatives

If you’re not delinquent to the creditor, but still struggling to pay the monthly bills debt settlement is probably not the best option. A better option could be a debt management plan, which actually could help your credit score, and get your debt paid off in the same 3-5 year time span as debt settlement.

Accruing late fees while not paying the delinquent debt will harm your credit score. DIY debt settlement has its advantages and disadvantages. You can save money, but if you don’t have a plan of how to tackle the debt with the creditor than it may not be the option for you.

In order to negotiate an offer for debt settlement, you need to have the money saved up to satisfy the settlement agreement. That may not need be possible for you at this time.

If you are still unsure about your financial situation talk to a nonprofit credit counselor who can discuss ways you can obtain a debt settlement. Another option is debt consolidation or a last resort, is filing for bankruptcy.

If you make a plan, and save money to execute the plan, you will be well on your way to being debt free.