When it comes to finance, most of us would prefer to solve our problems on our own without outside help. You probably don’t want to give someone an inside look at your finances. And how do you trust a complete stranger with an issue that’s so important. That’s why you’re here looking at a guide to how to negotiate credit card debt settlement yourself.
Before we get started with the DIY instructions, consider that when it comes to overcoming financial challenges, sometimes calling in the professionals is the way to go. Just like you take care of your health day-to-day, but you wouldn’t try to operate on yourself for major surgery, serious financial challenges often require professional help. So, this guide will teach you how to negotiate settlement on your own, but we’ll also explain when and why you may need to get help.
Not sure if you should try to negotiate debt settlement yourself or get professional help? Talk to a certified debt resolution specialist now for a free, no-obligation evaluation.
How to negotiate credit card debt settlement yourself step-by-step
- All debt settlement negotiations start with an offer – either a collector reaches out to you or you reach out to a creditor.
- In either case, the settlement offer is usually met with a counteroffer, where the other party tries to get an agreement that’s more favorable to them.
- Both parties negotiate back and forth until they reach an agreement that’s favorable to them.
- Once that agreement is reached, the terms of the settlement are laid out in writing and both parties sign the formal debt settlement agreement.
- You pay the amount agreed to in the settlement, usually in a single lump sum payment.
- Then the creditor closes the account and reports the final status of the account to the credit bureaus.
Defining your goals when negotiating a settlement on your own
It’s important when trying to negotiate a settlement that you have realistic goals. You’re not going to get out of debt for nothing – you’ll need to pay something to get your balances discharged. How much you end up paying depends on what you want to accomplish and who you’re negotiating with.
Here are some basic facts that can help you set the right expectations for credit card debt settlement:
- The average debt settlement pays out roughly 48% of the original amount owed.
- Each debt you settle will create a negative item on your credit report that will stick around for seven years and hurt your credit scores.
- However, there are several solutions you can negotiate, which allow you to avoid credit damage, including:
- Negotiating to list a credit account status as paid in full
- Negotiating to re-age an account to remove delinquent payments
- Using pay for delete to remove a debt collection account from your credit report
In many cases, you can negotiate to minimize the credit damage typically caused by settlement during the settlement negotiation. You may need to pay a larger percentage of the original amount owed to get a more favorable outcome for your credit. This is where professional help from a debt settlement company can be extremely beneficial. They have expert negotiators on staff who can help you get the best settlement agreement for your needs.
Debt settlement tips
Verify the debt first
If you get contacted about a debt, always ask the person on the other end of the phone to verify the debt. They should be able to provide:
- The full name of the person on the account (which should be your name)
- The name of the original creditor, if it’s a collection account
- A summary of the full amount you owe
If they cannot provide this information OR the information they provide does not match your records, dispute the debt. Ask for the agency’s name, the name of the representative that you’re speaking with, and a contact call back number. Then ask that they send you a written notice about the debt immediately.
Once you receive this notice, you have 30 days to dispute the debt in writing. You should send the letter to the collection agency by certified mail return, receipt requested. This will ensure you know exactly when they received your dispute letter.
Start low during the settlement negotiation
Even though settlement offers usually end up settling for just under half of what you owe, don’t start your negotiation that high. Most experts recommend starting around 15% of the amount owed and work up from there.
Also, don’t open with the fact that you want something like pay for delete or re-aging. Make a low-ball offer without any qualifications. Then, offer to pay a slightly higher percentage in exchange for the credit update. This strategy will give you room to negotiate an effective settlement that works for your needs and credit.
Know who you’re talking to
There are a few different types of companies that you may be talking to for a settlement:
- The original creditor – i.e. the credit card company that you have the account through
- An in-house collections department, who may be trying to collect on a debt that’s past-due but not charged off yet
- A third-party debt collector that’s attempting to collect on a charged off debt on behalf of the original creditor
- A debt buyer, who purchased a portfolio of bad debts from the credit card company for a small percentage of each amount owed.
A debt buyer is much more likely to settle for a lower amount. They paid pennies on the dollar to purchase your debt from the credit card company. If they purchased your debt for 5% of what you owed, then even a 10% settlement offer might be enough to get an agreement. They’d still make a 5% profit.
Original creditors are much less likely to settle and usually require higher amounts to get an agreement. Also, if the original creditor has not sold the debt, even a third-party collector can’t agree to a settlement without the creditor’s signoff. So, if you negotiate with ABC collection company, they must get the agreement from Capital One or Wells Fargo or you may still face issues. You could settle with the collection agency, but the original creditor will continue to come after you for the remaining balance.
An easy way to check if the original creditor sold the debt is to review your credit report. A debt that’s been sold will show the account as paid on the original account. Then a new collection account will appear on your credit reports from each of the three credit bureaus. This is a good way to double check who really holds your account.
From your very first contact with a creditor or collector, make sure to document and log everything that happens. Write down names of who you talked to with contact information. Detail what was said in phone conversations, in case you need later reference.
Also make sure that your settlement is provided in writing before you send a check or submit any form of payment. The debt settlement company should send you a formal settlement agreement by mail. It should include all of the details about the settlement. If the debt is still held by the original creditor, then a representative of that organization – and not the settlement company – should sign the agreement.
Make sure settlement is the best solution for your situation
Before you start negotiating a bunch of settlements, make sure that this is the best debt relief program to use for your unique financial situation. Credit card debt settlement is all about getting out of debt fast for the least amount of money possible. But it can also damage your credit.
If one or more of your accounts are still with the original creditors and you’re still managing to keep up with the required monthly payment on those accounts, you may be better off with another solution. Debt management programs that you can set up through a credit counseling agency will help you pay back everything you owe in a more efficient way. It’s basically a payment plan reduces or eliminates interest charges, so it’s easier to pay off what you owe. That way, you can avoid potential credit damage entirely.
Let Debt.com match you with the best solution for your needs based on your debt, credit and budget.
What to expect after you settle a debt
Even once you settle a debt, your work isn’t done.
Be prepared for extra taxes
According to the IRS, any portion of a debt you settle is counted as taxable income. Essentially, the amount you borrowed that you don’t have to pay back is treated as income. This means you should be receiving a 1099-c from the collector or creditor detailing the forgiven debt.
Unless you can qualify for an exclusion due to insolvency, you may be required to pay tax on the canceled debt. You’ll need to work with a licensed tax preparer to avoid this added burden on your taxes next year.
Check your credit report
This is especially crucial if you negotiated special credit report terms in your settlement agreement. But even if you didn’t do so, you’ll still want to take advantage of your free annual credit review to make sure everything in your credit report accurately reflects the debt you settled.
Decide what to do about your other debts
Credit cards are some of the easiest debts to settle. If you have back taxes you need to pay off, you may be able to reach a settlement with the IRS using an Offer in Compromise. And if you have private student loans, you may be able to use settlement to get out of those for less than you owe. If you have federal loans, debt settlement won’t work.
What to do if a settlement negotiation fails
If you aren’t successful at negotiating settlements on your own, don’t panic! There’s nothing stopping you from turning around and hiring a professional debt settlement company to do the negotiation for you. If a creditor won’t play ball or a collector refuses to agree to pay for delete, thank them for their time and get in contact with a debt resolution specialist. They will often have more success than you could achieve on your own – even if a previous negotiation already fell through.
Get the results you want with professional help. Debt.com can match you with a trusted debt settlement company now.
When are you better off working with a debt settlement company?
Deciding whether you should work with a professional debt settlement company or negotiate a settlement on your own, depends on a few things:
- Who you’re negotiating with
- What you want to accomplish during the negotiation
If you’re talking to a debt buyer, then you’re usually better off negotiating the settlement on your own for two reasons. First, a debt buyer is the most likely debt holder to settle for a low percentage; you don’t need to be an expert negotiator to get a good deal. Second, on collection accounts that have been sold to a third party, you almost always want to negotiate pay for delete. Debt settlement companies always negotiate for accounts to be listed as paid as agreed. This wouldn’t remove the collection account from your credit report.
If your debts are still with the original creditor or with a collector working on behalf of the original creditor, then you’re in a situation where you’re usually better off working with a debt settlement company. These negotiations usually require more skill to get you out of the debt for a percentage of what you owe. In this situation, you usually just want to get out of debt for the least amount possible as quickly as possible. So, in this case, you want to call in the experts to get the fastest, cheapest exit from your debt as possible.
Article last modified on July 25, 2019. Published by Debt.com, LLC