How to Negotiate a Debt Settlement on Your Own

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Kumiko Ehrmantraut

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Kumiko Ehrmantraut

Latest posts by Kumiko Ehrmantraut (see all)

• How to Live Within Your Means Without FOMO - October 29, 2020

Settling for less money than you owe can seem like a really good deal, especially if you feel like you are drowning in debt. There is an option to settle your debt using a debt settlement company, but I don’t recommend it.

After posting a picture on my Instagram, so many of you reached out for more information on how to settle your debts on your own. Working with a debt settlement company could end up prolonging your process (in my case, by two years), and it could cost you a lot more than you think.

I recommend a DIY (do-it-yourself) approach, which can be just as effective, and it could settle your debts sooner for a lot less money.

 

View this post on Instagram

 

I received this letter almost 10 years ago. Yes, my debt was sent to a collection agency because I couldn't afford to make the payments, so I decided to use a settlement company to pay off my debt. As embarrassing as it is to share this letter with you, it's important that you see the process of my debt payoff journey. It's important for you to see the time horizon of my journey, which started before I even graduated college. As I was organizing my office paperwork last night, I thought it was so surreal to find this letter, when at that exact moment I was sitting in my dream home that I just paid for with cash. As we go along on our debt journeys, they can seem so long. And in that time, it's hard to recognize the progress that we are making. Everything gets muddled down with living our lives and the length of time that passes. My debt journey isn't just the headlines you read about a single mom who paid off $77k of debt in 8 months, or the single mom who bought her dream home with cash. Like so many of you, I started at ground zero. I started with the struggle, with the confusion, with the overwhelm, and the feeling of defeat. I started out feeling like paying off my debt would be impossible. Nearly 10 years later, I can tell you that it's not impossible. Sure, I made a lot of mistakes (relying on a settlement company to fix my debt was one of them), it took 10+ years, and I failed in a lot ways, but I also succeeded in the end. I did end up settling this debt using the debt settlement company. It stayed on my credit report for 7 years, and I had to pay taxes on the difference that I didn't have to pay. I'm sharing this with you now so that you continue to fight on your debt journey, even if the journey is long, even if you have made mistakes, even if you feel like it's impossible. A life without debt is a life worth fighting for. Never forget that. #debtfreecommunity

A post shared by The Budget Mom by Kumiko Love (@thebudgetmom) on Mar 4, 2020 at 12:57pm PST

• Read: My Worst Money Mistakes

You can negotiate a debt settlement on your own by dealing directly with your creditors and lenders instead of paying a company to do it for you. People pursue a debt settlement when they are way behind on their payments, and it seems there is no light at the end of the tunnel. In this article you will learn:

• What is a debt settlement program
• How does debt settlement work
• When is debt settlement a good idea
• How to negotiate a debt settlement on your own
• How long does debt settlement stay on your credit report
• How does debt settlement affect your credit
• What should you do after reaching a debt settlement

Negotiating a debt settlement on your own will take some work, but I think it can be a fulfilling endeavor for you, and you won’t have to find even more money to pay a company to do it for you. After all, you need a debt settlement because you don’t have a lot of extra money.

• Read: Balance Transfers – How I Paid Off $7,500 In Credit Card Debt

What is a debt settlement program

Imagine you have maxed out your credit cards, you owe so much, and your bills are so high you cannot make ends meet, and you find yourself going deeper and deeper into debt to survive. At some point, your financial world will come crashing down, and you will need a way to fix the mess you are in.

Most people work with a for-profit company to help them come up with a plan to pay off their unsecured debt, eventually. It can take three or four years when you work with a debt settlement company. The amount you settle for will be less than what is owed. 

This is a debt settlement program in a nutshell, but it comes with some inherent risks, which we’ll talk about.

• Read: Should You Consolidate Your Debt?

How does debt settlement work

Here is what happens when you enter into a debt settlement program with a for-profit company:

• You must be late in your payments, usually at least 90 days late, but probably closer to five or six months behind.
•  You stop paying your creditors who extended to you unsecured debt, which includes things like medical bills, credit cards, and personal loans. Mortgages and auto loans are considered secure loans because if you do not pay your debt, then the lenders can come and foreclose the home or repossess the vehicle.
• You will have to deal with your credit score being ruined once you stop paying your creditors. You will not only be behind in your payments, but you won’t be making any effort to pay your creditors. This is all part of the debt settlement plan, but it can be risky.
• The harassing calls and letters demanding you pay your debts might slow when you work with a debt settlement company. A worker will reach out to your creditors and explain you are working on a plan. At that point, all communications with your creditors will cease.
• An escrow account will be opened, and you will make deposits into that account every month. Instead of paying your creditors, you are depositing your money.
• When you have saved a sufficient amount, an offer will be made to your creditors. Whoever you are working with from the debt settlement company will negotiate a settlement, which will either be accepted, rejected, or a counteroffer made.
• You will pay dearly for the debt settlement work done on your behalf. Debt settlement companies either charge a percentage of your total debt or the debt settled. Most debt settlement companies charge a 15% to 25% fee on the reduced debt amount. If they have you open an account to settle your debt, most likely that account is with a third party and will require account fees.

Risks of entering into a debt settlement program

When you enter a debt settlement program, you will have to deal with some harsh realities:

• Debt settlement is considered a last resort option for those who do not qualify for bankruptcy. One person has called it a “game of chicken.”
• You will pay a hefty fee to a debt settlement company. How they charge varies. Some might charge based on a percentage of what is owed at the time you start working with the company. Others charge a fee based on how much you save.
• Your credit rating will take a hit, but it already did because you were late on your payments. Settle your debt first, and then look into repairing your credit. It can recover, and it will take time.
• Your creditors have no obligation to accept your offer or settle your debt. No company can guarantee a settlement, and you will face challenges when you negotiate a settlement.
• There could be tax consequences. The Federal Trade Commission says any savings you get from debt relief services can be considered income and taxable.

How to negotiate a debt settlement on your own

If you decide to negotiate with a creditor on your own, it will take some time and confidence. Here’s how to negotiate on your own.

1. Figure out how much you owe and validate that you owe the money. Figure out how much you can realistically pay. Maybe it is 50% or 60% of what is owed. If debt collectors are calling, the folks at Debt.com say you should ask them to validate what you owe in a letter and demonstrate they have a legal right to collect the debt. You don’t want to admit you owe the debt, you just want something in writing from them stating they validate the debt is yours.
2. Open a special account and start saving your money. This part is critical. You will never be able to pay off your debt through a settlement if you do not have sufficient funds. Consider CIT Bank for establishing a separate account for your debt settlement plan.
3. Make a list of all the creditors you owe and how to reach them. At some point, you will have to contact them to inform them of what you have planned.
4. Get an understanding of debt collection works. Like all of us, debt collectors have a job to do. When you understand what they do and how they do it, you can better interact with them to settle. 
5. Research your creditors and find out what amount they will usually accept in a debt settlement offer.
6. Make a settlement offer. When you understand how the process works, you have researched your creditors, you have figured out how much you can pay, and you have saved some money, make an offer. Sometimes a debt settlement amount might be reached on your initial phone call when you are just starting the process, other times, and it will take a while. Be persistent. You can do this. And, to make it easier, Debt.com offers letter templates for you to use.
7. Ask your creditors to mark in your credit report, “Paid as agreed.” This will be tough, but it will look better on your report if you “paid as agreed.” Usually, they are marked as “settled” or “paid settled,” which does not look the best in your credit report. 
8. Understand the settlement agreement. When you and your creditors settle on an amount, they will send you an agreement. Make sure you understand it. You might see if an attorney in your city will do some pro bono work and read the agreement for you, so you understand what is in it. Or, if you know someone going to law school, they might be able to do it for you.
9. Pay the settlement. Before making the payment, make sure to get the terms of the settlement and credit reporting in writing. You want to make sure that both parties stay accountable.

What should you do after reaching a debt settlement

Make sure you are budgeting every pay period to keep on track of your finances. A budget lets you know where you are financially. If you follow a budget, you will avoid falling into debt traps.

Work on rebuilding your credit. Debt settlement can severely impact your credit score and should be used as a last resort. Remember, how settlement affects your credit score depends on the type of settlement and how the creditor reports it. Make sure to read this article to start improving your credit score.

• Read: 3 Tips for Paying Off Debt in Collections