With do-it-yourself debt settlement, you negotiate directly with your creditors in an effort to resolve 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 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.
» MORE: How does debt settlement work?
Why settle debts on your own?
Time and cost are the main differences between settling debts yourself and hiring a third-party debt settlement company.
Potentially faster timeline: If you’re going the DIY route, you can get started immediately by calling your creditors. (See our suggested script below.)
Using a debt settlement company is a more time-consuming process. You’ll start by saving money in an escrow account (a holding account provided by the settlement company). The settlement company then uses that money to make a lump-sum settlement offer to your creditor. The process often takes two to four years.
One caveat: While you can start negotiating with your creditors right away, it may take time to save enough money to make an offer they’ll accept. If you can’t afford a lump sum, you could offer to pay in installments, though creditors are more likely to accept an upfront settlement.
No fees: There are no fees when you settle debts on your own. If you work with a debt settlement company, you’ll typically 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 $10 monthly fee, you’d pay about $370 over three years.
Should you ever use a debt settlement company?
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. The more money you can save, the more likely it’ll be accepted.
Thoroughly research any settlement company before enrolling in a debt settlement program. A reputable company will be accredited by the Association for Consumer Debt Relief. They’ll also be transparent about fees and average timeline on their website.
When to negotiate on your own vs. use a debt settlement company
Consider negotiating debt settlement on your own if:
- You’re still dealing with the original creditor. If your accounts haven’t gone to collections yet, try to negotiate directly with your creditors. They may not be willing to settle for less than you owe, but many offer hardship programs, like a pause in payments if you’re in financial distress. This route can help you avoid lawsuits and serious damage to your credit score.
- You can afford a lump-sum offer on accounts in collection. If your accounts are already in collections, negotiating is often worth a try — especially if you can pay at least 25% to 50% of your balance. Debt collectors frequently buy delinquent accounts for pennies on the dollar, so they may accept significantly less than you owe.
- You want to avoid fees. Negotiating on your own is the cheaper option, given that third-party settlement companies usually charge 15% to 25% of the amount settled.
- You owe a relatively small amount. Many settlement companies require you to enroll between $5,000 and $10,000 worth of debt. If you owe a relatively small amount, DIY debt settlement may be the most viable option.
Consider hiring a debt-settlement company if:
- Your attempts at negotiating have been unsuccessful. If you’ve already tried negotiating with your creditors, working with a debt settlement company might make more sense. However, you may want to explore alternatives like a debt management plan first.
- You have large balances or many different accounts. A debt settlement company may be a better fit for larger debts or multiple accounts. Creditors may have more incentive to settle an account with a large balance, and negotiating with multiple creditors may get overwhelming.
- You want someone experienced negotiating on your behalf. Dealing with debt collectors can be intimidating, so you may prefer someone with experience taking the lead.
How to negotiate debt settlement
If you decide to negotiate with a creditor on your own, navigating the process takes some savvy and determination.
1. Confirm 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 won’t consider settlement until your debts are at least 90 days delinquent. After 120 to 180 days of delinquency, the original creditor may sell your debt to a third-party debt collector. You can still negotiate directly with your creditor.
- Are you sure you owe the money? Confirm that you owe the debt and that the statute of limitations hasn’t passed before you agree to pay. If you request a validation letter from a debt collector who contacts you, they’ll have five days to provide one verifying that the debt is yours.
- Do you have the money to settle? Some creditors want a lump-sum payment, while others may accept payment plans. The settlement amount varies based on how long the debt’s been overdue, how much you owe and how much you can afford to repay. Whatever offer you make, ensure you have the cash to back it up.
- Can you hold your ground under pressure? Negotiating with debt collectors can be stressful. Expect high-pressure tactics, and take time to understand what collectors legally can and can’t do under the Fair Debt Collections Practices Act (FDCPA).
2. Decide in advance how much you can afford to pay
When you negotiate a settlement offer, you're trying to pay a percentage of the debt you owe. If your debt is $5,000, for example, you may aim to pay only 50% of it.
Review your budget first and determine the actual amount you can pay. In this example, is $2,500 realistic?
Determine how much you can pay and stick to it. Debt collectors often try to intimidate you into accepting a settlement offer quickly that may be unaffordable.
» MORE: How to deal with debt collectors
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 of you.
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.
Briefly discussing the financial hardship that made you unable to pay your bills can make the creditor more sympathetic to your case.
Not sure what to say? Here’s a script to get started:
“Hello, my name is ___, and I’m calling about my account ending in ___. I’ve fallen behind on payments, and I’d like to talk about hardship options.
I’ve been going through a really difficult time because of ___. I’ve looked closely at my finances, including my other obligations, and I won’t be able to repay what I owe.
Based on my budget, I can make a one-time payment of ___ to settle the balance.”
The creditor will likely try to negotiate, so start low with your initial offer, and then work toward a middle ground. For example, if you know you can only pay 50% of your original debt, offer around 30%, so you have room to go up.
Don’t agree to an amount you can’t afford.
4. Get the agreement in writing
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
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. Settled accounts can stay on your credit report for seven years (starting from the first missed payment), so it’s important to make a plan to rebuild your credit score.
Prioritize any upcoming bills or payments to avoid late payments being reported to the credit bureaus. If you don’t have open accounts remaining that are reported to the credit bureaus, consider a secured credit card or credit-builder loan to re-establish good payment history. Also aim to reduce the overall amount of debt you owe by keeping credit card balances low.
» COMPARE: Best secured credit cards
Alternatives to debt settlement
Success can vary depending on the creditor. Some are open to settling, and others aren’t. If you hit a brick wall, there are other ways to tackle your debt.
Debt consolidation
If you have multiple high-interest debts, debt consolidation could save you money by rolling your balances into a single loan. You’ll typically need good to excellent credit to qualify for the lowest APRs, but it’s possible to get a debt consolidation loan with bad credit. Lowering your interest rates could save you money and shorten your debt payoff timeline, plus having a single monthly payment simplifies things.
» COMPARE: Best debt consolidation loans for bad credit
Debt management plan
A debt management plan is worth considering if you’re struggling with credit card debt in particular. A credit counselor will attempt to negotiate with your creditors to lower your interest rate and get fees waived. You’ll have one monthly payment that you make directly to the credit counseling agency, and you’ll pay off your debt in three to five years. There’s no credit score requirement, and the impact to your credit is much less severe than debt settlement.
» COMPARE: Top debt management plan companies
Bankruptcy
If you can’t repay at least a portion of your debt, it may be time to discuss your options with a bankruptcy attorney. Bankruptcy often makes sense when your debt exceeds 40% of your income and you can’t repay it within five years.
Chapter 7 bankruptcy wipes out most unsecured debt, while Chapter 13 reorganizes your debt and allows you to repay many of your creditors over three to five years.
Though bankruptcy can remain on your credit reports for up to 10 years, the damage to your credit score typically fades over time.
