DIY Debt Settlement: How to Negotiate with Creditors

What do you do when a debt collector calls? Do you let the call go to voicemail? Answer the phone and deny you owe the money? Agree to send them a payment?

When it comes to managing collection debt, the correct answer isn’t simple. While you don’t always have to pay the debt, ignoring a debt collector can cause your debt balance to grow, lead to more stressful calls and letters, and even get you into a lawsuit.

So instead of burying your head in the sand, or just blindly throwing money at the problem, it’s important to arm yourself with information and decide if it’s a good idea to pay. With the key tips below, you can potentially even negotiate a DIY debt settlement to pay less than what you owe.

Determine If Debt Negotiation Is Right for You

Negotiating your own debt settlement can save you money, but it’s not always the right move. Before you discuss sending money to a debt collector, or even confirm that a debt belongs to you, you need to review some information to figure out if it’s worth negotiating a payment:

1. Debt details: Ask for specific details of the account, including the name and contact info of the debt collector, who they bought your debt from, the balance owed and any interest or fees that have been added.
2. Your records: Review your credit reports and other records to verify that the debt belongs to you. You can pull your credit reports for free from AnnualCreditReport.com.
3. Statute of limitations: The statute of limitations is the amount of time a debt collector can sue you for unpaid debt. This time limit varies by state, but once it passes, the debt collector can’t take legal action to collect the money from you. The only way they can get it is if you volunteer to pay.
4. Find the drop-off date: Look on your credit reports to see when the account is due to be removed, which is also known as the drop-off date. This date is seven years from when you stopped paying. The closer you are to the drop-off date, the less the account impacts your credit scores.

If you determine the debt is really yours, consider whether or not you have a good reason to pay. The main reasons to pay are if you have a pending lawsuit, or if you need to take out a loan, but the lender has made your approval contingent on paying off the debt.

If you do have reason to pay, DIY settlement is one of the best options. Sure, you can pay a for-profit debt settlement company to negotiate on your behalf, but it’s risky, expensive, and not always successful.

Not even the most “reputable” for-profit debt settlement company can guarantee any results, but they will still charge you fees amounting to roughly 25% of your debt.

Pros and Cons of DIY Debt Settlement

Understand How the Debt Settlement Process Works

Don’t rush through the process of debt settlement just to get the discomfort over with. Even if a debt collector puts pressure on you to pay fast, it’s important to slow things down and do it the right way.

These are the proper steps involved with negotiating a fair DIY debt settlement deal, and avoiding the expenses and risks that come with for-profit debt settlement:

1. Request a debt verification letter from the collector and confirm if you need to pay.
2. Determine what you can afford to pay.
3. Contact the creditor to negotiate a lump-sum settlement.
4. Receive the terms of your settlement agreement in writing.
5. Send your payment.
6. Keep documents to prove the details of the transaction if needed.

Set Your Terms

If the debt belongs to you, and you determine you need to pay, the next step is to pinpoint how much you can afford to pay. As you do your calculations, keep in mind that if you settle for less than you owe, you may be taxed on the amount that’s forgiven. This is especially true with credit card debt, where high balances and interest can quickly inflate what you owe.

But don’t worry if you can only offer a portion of what you owe. Debt collectors are often willing to negotiate — usually accepting as little as 30% to 50% of the balance — just to recover some of the money owed. So, you can start negotiations by offering as little as 20% of the balance.

As you negotiate, aim to work out a lump-sum offer and not a payment plan. Not only do lump sum payments resolve the matter faster, but creditors are usually more willing to negotiate because of the immediate payback it represents. Having a strong foundation in understanding credit card debt can help you navigate these conversations with more confidence.

Just make sure you don’t offer or agree to pay more than you can afford. If you fail to send the money as agreed, you could reset the statute of limitations and extend the damage to your credit by another seven years.

Tell the Truth and Be Consistent with Your Financial Story

Debt collectors often use aggressive tactics to pressure you into paying a certain amount. For example, a debt collection agent might say something like, “I will accept half, but you have to pay by the end of the week, or we will demand the full amount.”

Don’t fall for these pressure tactics. One of the major mistakes debtors make is agreeing to pay more than they can afford in the heat of the moment.

But if you fail to send the money as promised, you could reset the statute of limitations and extend the damage to your credit by another seven years. Alternatively, if you pay more than you can truly afford, you might end up in more financial trouble.

So instead of giving in, be honest and clear. Make sure to communicate the following:

• Any financial hardship that’s keeping you from paying, and when you expect it to end.
• The exact amount you can afford to pay, and when you can make the payment.

If the person taking your call is stubborn, be polite but don’t give up. Your offer probably won’t be accepted on the first attempt, but after a couple of calls you might reach someone more flexible.

Learn Your Rights Under the Fair Debt Collection Practices Act (FDCPA)

If you’re used to dealing with debt collectors, you know how pushy they can be. But just because their aggressive or intimidating behavior is normal doesn’t necessarily mean it’s legal.

Thanks to the Fair Debt Collection Practices Act (FDCPA), here are some things debt collectors are not allowed to do:

According to the Consumer Financial Protection Bureau (CFPB), if you’re subject to harassment from a debt collector, you may have the right to sue.

Keep Detailed Communication Notes

This part might not seem necessary, but it’s crucial to document every interaction you have with a debt collector. It can be as simple as making notes in a Google document or on a sheet of paper. Here’s what to include:

• The name and phone number of the collection agency.
• Full names of people you speak with.
• Whether or not you requested a letter to verify the debt (which we recommend doing).
• Details of the debt you allegedly owe.
• Time of the call.
• Duration of the call.
• What you spoke about.
• Any legal action or other consequences that were mentioned.
• The tone of the conversation (e.g., contentious, friendly, etc.)

Negotiate with Creditors Directly

If the debt is overdue, but hasn’t been sold to a collection agency yet, the best solution could be reaching out to the creditor to see if you can negotiate a deal with them.

When you negotiate with creditors directly, you can avoid having debt go to collections and prevent further damage to your credit scores.

On top of that, the original company may even give you the opportunity to get your account back into good standing. If you explain that you’re having a financial hardship and ask for help, additional payment options may be made available to you.

Get All Agreements in Writing

If you negotiate a debt settlement, it’s essential to get the terms of your agreement in writing before you send any money.

Why? So, you can make sure the details are correct, and you have documentation if something goes wrong. For example, if the debt collector attempts to collect more money from you later, or if they fail to update your account status on your credit reports, you have paperwork to help you fix the issue.

The letter or email with your settlement terms doesn’t need to be elaborate, but it does need to state that your agreed-upon payment amount will be accepted as “payment in full.” Here’s a sample showing what the written agreement should include:

Dear [Debtor],

This letter is to confirm that, per our phone call on 2025, we have agreed to accept your payment of $[amount] for [account number] by 2025, as payment in full for this account.

[Creditor name]

Once you receive the agreement, send a secure but traceable form of payment, such as a certified check or cashier’s check. For your records, send it by certified mail and pay for a return receipt.

Alternatives to Debt Negotiation

There are certainly cases where you won’t want to negotiate your own debt settlement.

For example, maybe you had a bad experience with negotiations in the past, you have so many accounts you don’t know where to start, or you simply don’t have the money for settlements.

Depending on your situation, one of these debt relief options might be a better choice than DIY debt settlement.

A Debt Management Plan

Debt Management Plans (DMPs) are payment plans offered by nonprofit credit counseling agencies. If you go on a DMP, your counselor will work with your credit card companies and some other creditors to set up an affordable new payment arrangement.

If you go on a DMP, you’ll make one payment to the counseling agency each month, and they’ll distribute the money to your creditors, some of whom might reduce the interest rates on your credit cards to as low as 8%.

Another benefit of a DMP is that, unlike debt consolidation loans, your credit scores are not a factor in qualifying. Your creditors may also agree to forgive overdue fees and remove missed payments from your credit reports.

Debt Consolidation Loans

Debt consolidation involves rolling multiple debts – often high-interest debts such as credit cards – into a single payment. Ideally, that new payment would be lower than your current total debt payments, and your new interest rate will be lower, too.

One way to consolidate debt is with a balance transfer credit card. Balance transfer cards usually come with promotional, 0% interest periods. However, your interest rate will skyrocket after the introductory period (usually 12-18 months) and, in most cases, you’ll need credit scores above 680 to qualify.

Another option is to use a personal loan for debt consolidation. These are fixed-rate loans that you pay back in monthly installments over a set period of time, usually 3-5 years. Debt consolidation loans are sometimes available for borrowers with low credit scores (at higher interest rates, of course.)

Bankruptcy

Creditors are usually more open to negotiating debt settlement if they believe you’re considering bankruptcy. But before you go this route, it’s important to understand the serious ramifications.

Filing Chapter 7 bankruptcy can help you get the bulk of your unsecured debt forgiven. However, you must meet certain income standards to qualify, and filing Chapter 7 leaves a negative mark on your credit reports for 10 years.

Chapter 13 bankruptcy is a repayment plan administered by a bankruptcy court trustee. It allows you to pay debt over a period of 3-5 years, and then have the remaining amount dismissed after you finish your payment plan.

One benefit of Chapter 13 bankruptcy versus Chapter 7 is that it allows you to keep your property while you’re paying off debt. However, Chapter 7 can be completed in 4-6 months, while Chapter 13 takes several years.

Consult a Certified Credit Counselor

Negotiating debt settlement is overwhelming for some people. Want help figuring out how to settle debt and turn your situation into a success story? If so, a phone call to a nonprofit credit counseling agency is a great first step.

InCharge Debt Solutions is a trusted nonprofit counseling agency that has years of experience offering financial help and debt negotiation tips to consumers. For anyone struggling to manage debt, our counselors can work with you to offer personalized suggestions and support, so you can get clarity in the midst of a confusing predicament.