A Complete Guide to Debt Negotiation

Find out if debt negotiation is right for you

If you’re having trouble paying your bills and debt is mounting, it may be time to consider debt negotiation.

Whether you take on the challenge of doing it yourself or choose to place it in the hands of experts, debt negotiation is often a better option than filing for bankruptcy.

So what exactly does debt negotiation entail, and what makes this option a winner? We’ll investigate these questions and more so you can feel confident in how you choose to manage your debt.

Debt negotiation takes time and patience

Debt negotiation, sometimes referred to as debt settlement, is the process of negotiating with creditors to reduce the amount you owe. It may mean a lower interest rate on your outstanding debt or a reduction in the outstanding balance you still owe. It depends on what your lender is willing to negotiate. Either way, it benefits the lender to help keep you from bankruptcy.

DIY debt settlement

There are two basic options for handling negotiations. The first is Do-It-Yourself (DIY) debt settlement. This is when you negotiate a settlement agreement on your own behalf. When you do this, it’s best to be as prepared as possible since debt negotiation can be tough to navigate.

Here’s how to negotiate your own DIY debt settlement:

  • Be polite, yet firm. Your creditors have no obligation to negotiate. If they sense you are weak, they are liable not to budge an inch.
  • State your case. Be honest about why you are calling. Clearly state the alternative in a non-threatening way. Ask to speak to a supervisor if the individual that answers the phone is unwilling to negotiate. Be open to entertaining counteroffers.
  • Put it in writing. If you get nowhere by calling, put your request in writing. Write your letter in a professional manner clearly restating what you said on the phone. Keep copies of your correspondence.
  • Ask for help. Look for assistance from friends or relatives who have experience with debt settlement or who work in a profession that provides them with good negotiation and letter-writing skills. Seek assistance if it’s available.

Don’t expect miracles here. The odds are slim that all of your debt will be forgiven. However, if you have a debt settlement company on your side, you may be able to get a reasonable reduction.

What to look for in a debt settlement company

You may have tried the debt settlement route on your own and discovered you don’t have the skills to forge ahead. Or perhaps you want to entrust your debt settlement with an expert at the onset. Seeking the service of a debt settlement firm can give you an advantage.

A professional from a debt settlement company will have the skills to negotiate for a lower lump sum amount or lower interest rates. In addition, their entire job is centered around getting you the best rates possible. They have experience that you likely don’t have to navigate the process.

You can only be as good as the company you enlist. Some debt settlement companies are simply scammers looking to manipulate vulnerable people with a money grab. So what should you look for? Here are some key things to keep in mind during your search.

  • Find out their certifications. The specialist you choose should be IAPDA certified for you to be confident that they are knowledgeable in debt settlement.
  • Ask about their fees. Companies should charge fees only after they settled debts. If they’re trying to collect money beforehand, keep looking.
  • Be wary of guarantees. When it comes to debt settlement, there are no guarantees. Your creditors are ultimately the ones who choose to negotiate or not. That is why you should be wary of companies making extravagant claims for success. Find a company that is upfront about what you can expect in the process.
  • Listen to how they explain the process. Are they giving you the honest details about the consequences of debt settlement like its impact on your credit report? A company you can trust will want you to know the details. Avoid them if it sounds too good to be true.
  • Get the terms. According to the Federal Trade Commission, there are certain details any debt relief company provide before you sign up. In addition to the price, they should share how long the process will take, how much you need to save before they make an offer to creditors, and what the consequences are for pursuing debt settlement.
  • See if they are the right company for you. Some companies have requirements about your debt including how much debt you need to have and the types of debts you’re settling. Make sure you qualify.
  • Look for accreditation. A company that is accredited with the American Fair Credit Council or another esteemed accreditor has to meet certain criteria to prove they look out for their clients’ best interests.

No matter how you choose to settle your debt, there are smart ways to go about it so that you get the best result for yourself. Whether you choose to pursue a DIY debt settlement or go through a professional company, gather as much information as you can to make a superior decision.

Debt settlement FAQs

Before you assess whether to take this on yourself or look into debt settlement companies, there are other elements to scrutinize. Read through our commonly asked questions to find out what else you should consider.

Is debt settlement really worth it?

It’s difficult to respond to this question with a simple yes or no. It depends on your individual financial situation. For some people, especially those who want to avoid bankruptcy, debt settlement is worth it. But it’s not without its drawbacks.

If you’ve exhausted other options to find debt relief, you can pursue some financial freedom through debt settlement programs and perhaps bring down your lump sum payment. In fact, it could be your cheapest available option. But it is not a panacea, and if things go wrong, it could potentially put you in worse shape than you were at the beginning.

We will go over the major defects of this process later on, but the expectation with a debt settlement program is that you won’t pay back your debt at all for a set period of time. Not only will that affect your credit score in the interim, but if the debt collector refuses to negotiate, you end up with more debt than you had previously. That is one reason why working with debt settlement companies can be advantageous.

Can you negotiate with creditors for debt settlement?

Whether or not you can negotiate down your debt with a creditor is solely in the hands of the creditor. They cannot be forced to reduce your lump sum payment. That being said, it is certainly possible to have a positive outcome.

It’s important to have all the information possible before you embark on this path especially if you choose to pursue a DIY debt settlement. Then you can make sure you’re getting the best deal for yourself.

What percentage should you offer to settle debt?

This is a variable number determined by your personal financial situation since your financial history and the specifics of the debt in question can reflect how much of a lump sum creditors will think you can pay. Obviously, they want to get back as much of the debt as they can.

You will want to start your negotiations at the high end of your expectations since there will most likely be a proportional counteroffer in the opposite direction. Suggest making the payment about 30 percent of the total amount. From there, see how open creditors are to negotiation.

What is a reasonable full and final debt settlement offer?

Your expectation for the debt settlement agreement should be somewhere in the range of 30-60 percent of the total debt. If creditors are not budging beyond 60 percent repayment of the total amount, you may want to consider getting additional help.

There are several factors that creditors consider when determining how low they want to go. Probably the most influential is how much debt you have with this creditor. Your current finances weigh heavily as well. The more you are able to pay, the more a creditor will want to get from you.

Who the creditor is also pays a role. Some are more willing than others to engage in debt negotiations. You should try to find out what you can about this specific creditor beforehand. If the debt in question is old, they also might be more flexible in giving you a lower lump sum total.

What else should negotiators know?

When you’ve finally come to an agreement with a creditor, make it final with a written contract. This gives you an advantage rather than relying on a verbal acknowledgement. A creditor could easily decide to renege on their statement with no fear of accountability.

Drawbacks to debt settlement

Whether you go at it alone or enlist the aid of a debt settlement firm, there are some things to consider before you try debt negotiation.

Income tax

Many people are so focused on substantial debt relief that they fail to realize that by settling for less than what you owe, the IRS will expect you to pay income tax on the difference. For instance, if you have $10,000 in credit card debt and the lender forgives $5,000, it means that you got a $5,000 taxable payday.

Debt collection

One of the most important parts of settling any debt is ensuring that the debt is cleared. To do this, make sure you obtain a Form 1099-C from the creditor so they can’t send the remaining debt to a collection agency. Otherwise, you will likely begin receiving phone calls from collection agencies trying to collect on the unpaid portion of your debt.

Inform your creditors

Before you decide to ignore your creditors’ requests for payment, consider that they may seek legal action against you. That’s why it is important to keep them in the loop throughout the process. If you work with a debt settlement company, they are aware of this.

Credit rating

As much as the debt settlement company will do what they can to salvage credit scores, lenders want their money. If you don’t pay or if you negotiate a settlement, it will go into your credit report and negatively affect your overall credit rating.

Pay to play

Whether it’s your money or your time, the cost of debt settlement can be steep especially when using professional services. You’re paying for their expertise and for the convenience of not having to negotiate for yourself. Make sure you understand all the costs upfront.

Alternatives to debt settlement

If the drawbacks of debt settlement have you reconsidering that decision for your finances, you should be aware that alternatives exist. These could be a more fruitful course toward debt relief for the right person. Let’s dissect the other financial options.

Credit counseling

Credit counseling agencies can be a good place to start. But be careful. Despite having the label of a “non-profit,” there are many disreputable credit counseling agencies that could put you in a worse position than you started in.

Checking credibility with the Federal Trade Commission or Consumer Financial Protection Bureau can aid you in making a safe choice.

Find an agency that is willing to provide services without payment needed. If the credit counselor expects to make a commission from you, seek help elsewhere. You want to choose a company that has your best interests in mind first, not their own compensation.

Once you find a trustworthy source, a credit counselor can assist you with setting up a debt management plan or providing other information. This could range from financial classes to budget plans. The goal is to set up a manageable repayment plan.

Debt consolidation

This option is for those who have several different debt collectors. Debt consolidation is when you take all those debts – for example, credit card debt and medical bills – and bundle them into one.

This doesn’t just make it easier for debt management purposes. It’s also possible to lower your interest rates or monthly payments through consolidation.

Debt consolidation could be either secured or unsecured debt. If the loan is secured, you will need collateral in the form of an asset such as your house. Unsecured debts do not require this step. Compare the rates of the lenders below to get an idea of what to expect.

You need to pay fees as well such as the application fee. You also can expect to pay more than you would with the debt settlement process, as the lump sum is simply being broken up into monthly payments instead of being renegotiated.

While your credit score has the potential to take a hit if you are closing credit lines, you could also see an improvement of your credit score over time as you make your payments. After all, the heaviest factor of someone’s credit score is their payment regularity.

Bankruptcy

Declaring bankruptcy is the severe alternative for those who need assistance beyond debt settlement. This action can have a detrimental impact on your credit score for longer than debt settlement.

It is also a matter of public record unlike when you are negotiating. However, based on how much debt you have, bankruptcy is sometimes the only option to settle debt.

There are several bankruptcy types to choose from depending on your needs. The most common options for individuals are Chapter 7 bankruptcy and Chapter 13 bankruptcy.

Chapter 7 bankruptcy involves selling your assets in order to pay your creditors. Chapter 13 differs from 7 in that it turns your debts into monthly payments. While you spend longer paying off the debt, you can hold onto your assets without fear of repossession – that is unless you stop making payments.

Whichever direction you select, it’s best to have as much knowledge as possible. With a little time and a lot of patience, you can get your finances back in order. The debt settlement companies below are a good place to start if you decide to hire a professional to negotiate your debt.