Advertiser Disclosure
Advertiser Disclosure: The credit card and banking offers that appear on this site are from credit card companies and banks from which receives compensation. This compensation may impact how and where products appear on this site, including, for example, the order in which they appear on category pages. does not include all banks, credit card companies or all available credit card offers, although best efforts are made to include a comprehensive list of offers regardless of compensation. Advertiser partners include American Express, Chase, U.S. Bank, and Barclaycard, among others.

Debt Settlement Negotiation – Do-It-Yourself Guide to Beat the Creditors


Dig Deeper

Additional Resources

When you’re drowning in debt with no prospect of paying it off, debt settlement companies appear to offer a lifeline. They promise to negotiate with your creditors to settle your debt in return for a sum that’s less than the total amount you owe. Lenders often agree to the settlement rather than risk having to write off your debt as a complete loss.

But dealing with a debt settlement company isn’t the only bankruptcy alternative. You can cut out the negotiator and settle with your creditors yourself. A do-it-yourself debt settlement can be just as effective and lets you put more money toward your debt rather than paying fees.

Reasons to Choose DIY Debt Settlement

Using a debt settlement company can be less work than negotiating on your own, but it has some significant downsides. Firstly, debt settlement companies don’t help you out of the goodness of their hearts. They’re for-profit companies working for a fee.

According to Forbes, most debt settlement companies charge 15% to 25% for their services. It can be a percentage of either the total amount you owe or the settlement amount. Thus, if you settle $10,000 in debt for $5,000, you could owe another $750 to $2,500 in fees.

DIY debt settlement can also be faster. Debt settlement companies often require you to stop making payments on your debt and instead set money aside in a special account for at least 36 months (three years). They don’t begin negotiating with your creditors until there’s enough in the account to cover your lump-sum payment and their fee.

This plan is both slow and risky. According to the Federal Trade Commission (FTC), many people can’t keep up the payments for the full three years. They drop out of the program without getting their debts settled.

Even if you manage to make all the payments, there’s no guarantee the company can settle all your debt. And in the meantime, those three years without any payments damages you financially. Your credit score will fall, and your debts may continue to accumulate late fees and penalties, leaving you still more to pay off.

Worse, the FTC says many debt settlement programs are dishonest about what they can do for you. Some “guarantee” to wipe out 40% to 70% of your debt even though there’s no way they can force your creditors to settle. Others try to collect their fees upfront before settling any of your debt, a practice prohibited by law.

Even the companies that don’t outright lie sometimes fail to warn you about the risks involved. They don’t warn you your credit will suffer, that debt collectors can continue to call you, and that many customers end up dropping out of their programs without getting a settlement.

For most people, do-it-yourself debt settlement is a better choice. By dealing directly with your creditors, you can settle your debt as soon as you’re able to manage it rather than being forced to wait three years. And while you have no guarantee of success, at least you don’t have to pay a hefty fee for a plan that might not eliminate all your debt.

How to Negotiate a DIY Debt Settlement

Negotiating with creditors on your own isn’t a quick or painless process. It takes effort, determination, and a certain amount of nerve to call lenders and ask them to cancel your debt for less than its value.

Before taking on this challenge, figure out if debt settlement makes sense for you. Lenders are most likely to settle a debt when it’s at least 90 days past due, but it hasn’t yet gone to debt collection. Unsecured debt, such as credit card debt and unpaid medical bills, are typically easier to settle than mortgage debt, student loans, or back taxes.

It also pays to consider all the alternatives. For many people, other debt-relief options, such as credit counseling and debt consolidation loans, offer a less risky path to becoming debt-free. For others, bankruptcy is the quickest and most painless solution.

If you’re sure negotiating your own debt settlement is the right choice for you, it pays to have a step-by-step plan you know can work.

1. Determine Your Budget

Before you can begin negotiating with creditors, you need to know exactly how much you can afford to offer them. Many creditors require a large lump-sum payment to cancel your debt. Some are willing to accept a monthly payment plan, but they’re likely to ask for more money in total.

Go over your household budget line by line looking for any places you can squeeze out a little extra cash for a monthly or one-time payment. Start by cutting back on extras like your cellphone plan, gym membership, or cable TV. If that’s not enough, look for more significant savings, like giving up your car, finding a cheaper apartment, or slashing your grocery bill.

Pro tip: If you need to reduce your expenses, sign up for Truebill. They can help you negotiate lower rates on your bills and cancel unwanted subscriptions.

Also, look for ways to earn extra income to boost your payments. For instance, you can work additional hours, take on a side gig, or sell stuff online.

If you have trouble with the budgeting process, a credit counselor may be able to help. The National Foundation for Credit Counseling can help you find one. Some nonprofit organizations, such as GreenPath, provide credit counseling services for free.

Once you’ve figured out how much you can afford to pay — either upfront or as a monthly sum — write that number down. It’s your maximum budget for negotiating with creditors. Don’t agree to any deal that requires you to pay more than that number. If you do, you’ll just end up falling behind on payments again, and you’ll be right back in the same situation as before.

2. Have a Clear Narrative

In any type of negotiation, it helps to have a clear narrative. For instance, if you’re asking for a discount in a store, you can point out a defect in the merchandise or point out that you’re a regular customer. When negotiating with creditors, the first thing to give them is a clear, concise explanation of why you’re having trouble paying your bills.

There’s no need to go into lots of detail here. Just provide a sentence or two explaining the problem you’ve had and how you’re trying to deal with it. For instance, you might say, “I was laid off from work during the COVID-19 pandemic, and my household income was cut in half. I’m looking for part-time work, but I can’t meet the payments right now.”

Stick to the facts, and avoid the temptation to exaggerate. Once you start exaggerating the truth, it’s much harder to keep your story straight. If you tell a different tale each time you call, you’ll make the creditors suspicious, and they’ll be less willing to cut a deal with you.

3. Bring Up Bankruptcy

The primary reason creditors have to negotiate with you is that they fear losing their entire investment if they don’t. If they have to sell off your debt to a debt buyer, they’ll get very little, and if you go bankrupt, they could get nothing.

Thus, it makes sense to bring up the danger of bankruptcy early in your conversation. Even if you’re not really considering bankruptcy as an option, suggesting it’s a possibility gives your creditor an incentive to strike a deal. This threat works best with unsecured lenders, who are most likely to end up with nothing if you file for bankruptcy.

4. Make a Lowball Offer

Start your negotiations by making a lowball settlement offer. For instance, you could ask the creditor to settle the debt for 15% of what you currently owe. Don’t expect the creditor to accept this offer. Instead, they’ll probably make a higher counteroffer, such as 80%.

From there, you can gradually work your way toward a middle ground. However, by starting low, you improve your chances of ending up with a number that’s less than half your original debt.

As you negotiate, keep your budget in mind. For example, if you know the most you can afford to pay is 40% of your total debt amount, start low enough to end up with a settlement no higher than that amount. Settling your debt for an amount you can’t afford is no better than not settling it at all.

5. Stay Calm

When you’re under a lot of financial stress, it’s frustrating if the person on the other end of the line doesn’t show any sympathy for your problems. However, taking that anger out on your creditor or a debt collector doesn’t get you anywhere. Most likely, they’ll just label you a problem customer and hang up.

To keep the other person talking, do your best to stay calm. If you find yourself growing upset, tell the other person you need to call them back, and hang up. If you’re having problems with a customer service rep who’s being particularly rude or harsh with you, tell them you’d like to record the conversation. Chances are they’ll start acting more polite at that point.

Likewise, don’t panic if a debt collector starts threatening you with a lawsuit or loss of property. Instead, calmly ask for more information. For example, you can ask when you’ll receive official notice about the lawsuit or when they’ll take the money from your bank account.

Make careful notes of how the collector answers these questions. There are legal limits to what debt collectors can say and do to you, and there’s a chance their threats are over this legal line.

For instance, a debt collector can’t legally threaten to throw you in jail. They can’t even threaten you with a lawsuit or property seizure unless they plan to follow through. If you catch a debt collector breaking the law, you can turn the tables by suing them and possibly get reimbursed for damages such as lost wages.

6. Be Patient

You probably won’t be able to settle your debt the first time you call a creditor. In some cases, the first person you talk to doesn’t have the authority to make a deal with you, and in others, they just aren’t willing to.

Instead of giving up, call back to see if you can reach someone more cooperative. If you’re not getting anywhere with customer service representatives, ask to speak to a manager.

Even once you get through to someone willing to bargain, it could take several rounds of debt settlement negotiations to reach a deal. Take notes of all your conversations with creditors and collectors. Include the name of the person you talked to, the date and time, and the subject matter.

These notes provide you with a record of what the last offer was next time you call. That way, your creditor can’t attempt to go back on an earlier offer. Keep all your notes in a file along with any letters you receive from the creditor or debt collector.

As you negotiate, keep your eyes on your goal. Your aim should be to settle all your debts if at all possible. Ideally, you’d also like your creditors to list them on your credit report as “Paid as Agreed.” It hurts your credit less than if they’re listed as “Settled” or “Paid Settled.”

However, if you can’t get them to agree to that, you at least need to settle enough of the debt to bring the remaining balance down to a level you can handle. Otherwise, you’ll be no better off than you are now.

7. Get It in Writing

When you finally reach a deal with a creditor, make sure to get all the details in writing. That includes the amount you’ve agreed to pay, the amount they’re forgiving, the terms of repayment (a lump-sum or payment plan), and the way they’ll list the settlement on your credit report.

It’s a good idea to get your settlement agreement on paper before paying back any of your debt. Without a written deal, your creditor could change the terms of the agreement without warning. For instance, your assigned rep could leave the company, and you’d have no way to prove to their replacement you’d already agreed to a deal.

But remember that a written agreement cuts both ways. It holds you to account too. If you miss even a single payment, the creditor can withdraw the entire settlement deal, and you’ll be right back to square one. They’ll simply apply all the money you’ve already paid toward your full balance, and you’ll still owe the rest.

Negotiating Strategies for Different Types of Debt

The specific strategies that can benefit you most in your negotiation depend on what kind of debt you have. In some cases, you can talk your creditors into settling your debt by stressing the risk of bankruptcy. In others, getting a debt settlement is unlikely, but there are other programs that can help make your debt more manageable.

Credit Card Debt and Other Unsecured Loans

Both credit card debt and unsecured bank loans are relatively easy to negotiate. With these types of loans, lenders know that they’ll probably get nothing if you go bankrupt. Thus, the best way to get them to play ball is to start your negotiations by bringing up the danger of bankruptcy.

Unpaid bills, such as hospital or car repair bills, are another type of unsecured loan. You can negotiate with any service provider — such as a doctor, dentist, attorney, or car mechanic — just as you would with a bank or credit card issuer. Since they will probably get nothing if you go bankrupt, bringing up the risk of bankruptcy gives them a strong incentive to negotiate.

Talking to the right person is also essential. According to Nolo, a customer service agent at your credit card company probably can’t make a deal with you on debt settlement. Talk politely with the agent, but don’t be surprised if they turn down your request.

Instead of giving up, simply ask if you can talk to a supervisor or be transferred to another department. Sometimes, you need to talk to several people before you reach someone who’s in a position to negotiate.

Auto Loans and Other Secured Loans

Secured loans, such as auto loans, are harder to negotiate. The lender can always just repossess your car to recover the lost money. Often, it makes more sense to sell the car yourself and use the money to pay off the loan. However, this isn’t an option when you have an upside-down car loan, meaning you owe more than the car’s worth.

In this situation, Nolo says your best bet is to contact the lender right away — as soon as you miss your first payment. Any delay increases the risk they’ll repossess your car. Ask about options such as:

  • Changing Your Payment Date. Ask if the lender can change the date when your monthly payment is due to match the timing of your paycheck. In some cases, this small change is all you need to make your payments manageable.
  • Waiving Late Fees. A lender who’s willing to change your payment date might also consider waiving the late fee on payments you’ve already missed. They might even be willing to reduce the interest you owe on the missed payments, making the overdue balance more manageable.
  • Refinancing. See if the lender can refinance your loan to make the payments lower. That usually means extending the loan term, which means you’ll take longer to pay off the loan and pay more interest overall. However, it’s often better than losing both the car and all the payments you’ve made to date.
  • An Extension. Extending your loan means tacking the payments you’ve missed onto the end of the loan term. Lenders are usually willing to do this only if you’ve made at least six payments and you can show your financial problems are temporary. Also, they typically charge a fee, such as one month’s interest or 1% of your remaining balance.

Student Loans

Federal student loans are tough to negotiate because you can’t dodge them by declaring bankruptcy. However, there are government programs that allow student loan forgiveness in certain circumstances. You may qualify if you have a low income or do a type of work that’s considered public service.

Other student loan payment programs help you reduce your monthly payments or delay paying for a set period. For example, income-driven repayment plans set a monthly payment based on what you can afford.

Settling a student loan is possible, but only if the loan is in default. According to U.S. News & World Report, that usually means you’re nine months late on payments for federal student loans or three months late for private student loans. If your federal student loan has gone to a collection agency, it can generally accept only three kinds of settlement deal:

  • You pay the whole loan amount plus any unpaid interest, but no additional fees
  • You pay the whole loan amount plus half the interest you owe
  • You pay 90 percent of all the money you owe, including principal and interest

For any other deal, the agency must get approval from the United States Department of Education.

With private student loans, there’s more leeway for negotiation. Stanley Tate, a student loan lawyer interviewed by U.S. News, says it’s often possible to settle a loan that’s in default for 30% to 60% of the total owed. You can pay the money back as a lump sum or in installments.

Mortgage Loans

Although mortgage lenders always have the option of foreclosing on your home, they prefer to avoid doing so. They can get back the value of the loan balance this way, but no interest, and they have to jump through a bunch of legal hoops. Thus, lenders are usually willing to help you find a way to avoid foreclosure.

If you’re behind on your mortgage payments, talk to your lender about options like:

  • Refinancing. Normally, mortgage lenders don’t like to refinance a mortgage unless you have significant equity (that is, you own a large share of the home). However, if the alternative is foreclosure, refinancing is usually a better deal for the bank.
  • Loan Modification. In a loan modification, the lender alters the terms of your mortgage to make the payments more affordable. For example, it can lower your interest rate or extend the loan term.
  • Forbearance. If your inability to meet mortgage payments is only temporary — for example, if you were laid off from your job due to the COVID-19 pandemic — the lender can agree to pause or reduce your mortgage payments for a while. In exchange, you promise to pay extra later to make up for the missed payments.
  • Short Sale. In a short sale, you agree to sell your home for less than you owe on the mortgage, and the lender agrees to accept this smaller sum as full payment. A short sale hurts your credit as much as a foreclosure, but the process is easier. Some lenders actually require you to try a short sale before they’ll consider a loan modification.

Final Word

Settling your debt with a creditor can be a huge relief, but it isn’t the end of the story. Making your final payment frees you from the debt, but you’re still on the hook for any extra tax you owe on the forgiven debt. So even once the debt is gone, you may still need to save money for a while to meet that obligation.

Also, your credit score will most likely take a hit from the process. There’s some good news here, though: if your debt woes were in any way due to the COVID-19 crisis, settling a debt won’t harm your credit.

Under the 2000 Coronavirus Aid, Relief, and Economic Security Act, any creditor who makes an accommodation for you due to problems caused by COVID-19 must report your account as “current” as long as you hold up your end of the bargain. That applies only to accounts that were in good standing before the pandemic hit.

Once you’re free from the burden of unmanageable debt, you can get to work on improving your credit. Steps that can help include paying bills on time, reducing the amount you charge on credit cards, and paying down other debts. If you no longer have any usable credit cards, consider applying for a secured card to rebuild your credit.


Stock Advisor

Motley Fool Stock Advisor recommendations have an average return of 618%. For $79 (or just $1.52 per week), join more than 1 million members and don't miss their upcoming stock picks. 30 day money-back guarantee.

Stay financially healthy with our weekly newsletter

Amy Livingston is a freelance writer who can actually answer yes to the question, "And from that you make a living?" She has written about personal finance and shopping strategies for a variety of publications, including,, and the Dollar Stretcher newsletter. She also maintains a personal blog, Ecofrugal Living, on ways to save money and live green at the same time.