Debt settlement is one solution for unaffordable debt, and there are lawyers and companies that settle debt for their clients. However, professional debt settlement can be expensive, depending on whom you hire, where you live and the type of debt you have.
This article covers how to negotiate credit card debt settlement yourself. You might be able to save some money by following six steps to DIY debt settlement.
What Does It Mean to Settle Debt?
Debt settlement simply means negotiating with an unsecured creditor, usually a credit card issuer, to get out from under a balance. Generally, this means offering your creditor a lump sum that’s less than the full amount owed. Sometimes, a creditor will accept a series of payments. Of course, your credit card company is under no obligation to negotiate with you, and some have a policy not to.
That said, many creditors will forgive debt under the right circumstances. They consider how likely they are to recover what you owe, how much it might cost to pursue you for payment and how long it might take to claw back their money. In most cases, credit card companies won’t negotiate with consumers who are current on their accounts and capable of repayment.
[SEE: Best Debt Settlement Companies]
How Professional Debt Settlement Works
With a debt settlement company, you first work with a debt consultant to analyze your finances and create a plan. You’ll decide which accounts to enroll, set up a debt settlement savings account and make regular deposits.
Debt settlement companies may recommend that you stop making minimum credit card payments and put the money into savings instead. This helps you come up with a lump sum to offer creditors and also helps convince them that you can’t afford to repay the entire amount owed.
Debt settlement companies and creditors might require proof of financial hardship before they’ll help you — like a job loss, medical emergency, unexpected expense, reduction in income, divorce or other circumstance that you can’t control.
Once you’ve saved enough money to make an offer to a creditor, a debt negotiator makes contact and offers a percentage of the outstanding balance to settle your account in full. There may be some back-and-forth, but many settlement companies have established relationships with creditors and they reach agreements quickly.
You’ll be advised that an offer is on the table, and it’s up to you to accept or decline it. You only pay a debt settlement fee once you’ve agreed to settle and release money to the creditor. You’ll repeat the process until there are no more accounts to settle.
[Read: Best Bad Credit Loans.]
How to Negotiate Debt Settlement on Your Own
“DIY debt settlement can work, but it’s a narrow path. Someone with just one or two accounts, a modest debt load, and the ability to stay organized and handle tough calls might manage it on their own,” says David Gelinas, director of administrative services at the law firm National Legal Center and co-founder of the Association of Independent Consumer Credit Counseling Agencies.
There are six steps to DIY debt settlement:
1. Review your finances and define your hardship.
2. List your debts, smallest balance to largest.
3. Research the creditors.
4. Build up your settlement fund.
5. Open negotiations with your first creditor.
6. Make your payment.
Repeat steps 4 through 6 until every credit card balance has been resolved. If you’re able to quickly save or borrow enough to negotiate all of your debts, you can combine steps 5 and 6 and negotiate every account at once.
Reviewing Your Finances
This means looking at your budget to see how much money you can save for debt negotiation. What can you sell, what savings (except retirement funds) can you tap? What’s your credit score? Can you borrow money for debt settlement? What hardship can you claim when you contact creditors? How will you document it?
This will help you see if debt settlement is workable for you and tell you how quickly you might get through the process.
Listing Your Credit Card Debts
Next, list your credit card balances. You could order them from the smallest to largest balance. This is similar to the debt snowball method of debt acceleration. Alternatively, you might first target accounts most likely to trigger a lawsuit: According to the Consumer Financial Protection Bureau, credit card companies were most likely to sue on charged-off accounts with higher balances ($4,587 to $10,980 on average).
“One of the biggest pitfalls of DIY is underestimating how quickly a situation can shift,” Gelinas says. “I’ve seen people try to handle things themselves, only to face aggressive collection tactics or even legal action.” Gelinas notes that “not every situation can be ‘fixed’ after the fact — sometimes the window to negotiate or settle closes when legal action begins.”
Researching Credit Card Companies
In addition to getting the contact information for the person or department you’ll be negotiating with, it’s helpful to do some digging on online forums and social media. There’s a lot of chatter out there about what certain companies will agree to, with posters often happy to list their balances and the percentages they paid to settle. You might also see which companies are more or less likely to sue past-due customers. When you’re settling debt on your own, knowledge is power.
If your research turns up bad news for you, you might want to turn to a pro sooner rather than later. “For anyone with larger balances, multiple creditors or any sign of legal escalation, professional help is almost always the smarter path,” Gelinas says.
Saving a Fund
In most cases, you’ll need to offer a lump sum (although some creditors will accept a series of payments). Direct every cent you can into a debt settlement fund. Part of this strategy may include not paying one or more of your credit card accounts. This may convince creditors that you can’t afford your entire debt, help you save your lump sum faster and possibly prompt a creditor to make an offer to you. That’s right. Sometimes, creditors reach out to past-due account holders and make them offers.
Opening Negotiations
Work out the most you’re willing to pay (in dollars, not percentage), and how you’ll pay — lump sum or a series of payments. You can contact your creditors online or by mail, but it may feel more natural to do this by phone. “Call the creditor directly — calm, confident, and ready to negotiate,” says Xavier Epps, founder and CEO of XNE Financial Advising. “Aim to settle for 40% to 80% of the balance.” Epps notes that you should offer less for older debts that will soon become uncollectible due to statutes of limitations.
When negotiating by phone, it can be helpful to write your terms and keep them in front of you. If your creditor makes you an offer, you can accept it, decline it or counter it. It may get tough. Don’t release any money until you receive a written offer from the creditor.
Making Your Payment
Review your written agreement when making payment. If the creditor drafted the agreement, it probably specifies how you are supposed to pay and how the settlement will be reported to credit bureaus. Make sure you reference your agreement when you pay, whether it’s through an online portal, by check or another way. Keep a copy of your agreement and a record of every payment.
[Could You Owe Taxes on Forgiven Debt? How to Find Out]
Rinse, Repeat
After several weeks, check your credit report to make sure that your account is closed, your balance has been zeroed and the settlement reported per your agreement. “Stay sharp, stay consistent,” says Epps. “With a solid plan and patience, you can slash that debt and regain control — no middleman needed.”
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How to Negotiate Debt Settlement Yourself originally appeared on usnews.com
