Should you Negotiate Debt Settlement on Your Own? Here’s How it Will Impact Your Credit

If you’re struggling with credit cards, loans or debt in collections, you’re probably desperate for a solution. Debt settlement is one option that often looks attractive at first glance but is more problematic than it appears.

This is especially true in the case of “professional” or for-profit debt settlement—an arrangement where you hire a debt settlement firm to negotiate with creditors on your behalf. This option is so risky that it’s difficult to list all of the problems involved. In addition to being expensive, it takes years to complete, wreaks havoc on your credit scores and can put you at risk of being sued.

 If you’re considering debt settlement, a “do-it-yourself” or “DIY” approach could be a better solution for your finances and credit.

Should You Negotiate Your Own Debt Settlements?

DIY debt settlement involves working directly with your creditors and debt collectors to negotiate settlements. There’s no guarantee you’ll be successful at negotiating, but the DIY approach is far more affordable and less damaging than hiring a for-profit debt settlement firm.

If all of the following circumstances are present, DIY debt settlement might be a good option:

• Overdue debt: You’re already behind on payments and your creditors won’t offer you options to catch up. 
• Number of accounts: You have a small number of accounts to resolve.
• Affordability: You can afford to pay a lump sum of somewhere between 30% to 50% of the total amount you owe.

If you’re still current on your debt payments, another solution like a debt management plan is likely a better option. NFCC-certified credit counselors can also help you explore this option.

Is it Better to Pay for Debt Settlement or Do it Myself?

DIY debt settlement is a far better option than hiring a for-profit debt settlement firm, since debt settlement is perhaps the most expensive and least effective method of repaying debt.

Sure, you might feel uncomfortable negotiating debt on your own, but the drawbacks of hiring a debt settlement agency are far more uncomfortable. They include: 

• Monthly payments to the firm are usually required for 3-4 years
• Credit scores usually drop by more than 100 points since you stop paying your creditors
• No guarantee that creditors will agree to settle
• A minimum of $10,000 is usually required to enroll
• Flat fee of 15%-25% of your enrolled debt, even if negotiations are unsuccessful
• Debt balances can increase due to late payment fees and penalty interest rates
• Creditors are more likely to sue you for the debt

How to Settle Debt On Your Own

If you pursue DIY debt settlement, we recommend taking these steps to increase your chances of a positive outcome.

1. Validate the Debt

For collections debt, ask the collection agency to validate what you owe first, to make sure it’s a legitimate debt that belongs to you.

You should also make sure you’re legally obligated to pay. There’s a possibility the statute of limitations has passed or that your federal benefits are protected from debt collectors, for example. Before offering money to a creditor or collector, you can review your situation with an NFCC-certified credit counselor for more insights.

1. Do Some Research

For debt owed to the original creditors (usually credit card companies and lenders) the first step is to research their policies on debt settlement. They may offer options to bring your account current or have an FAQ page with information about settling debt.

For debt in collections, check out the Consumer Financial Protection Bureau’s (CFPB’s) tips on negotiating settlements. You can also meet with a certified credit counselor for free advice on how to negotiate.

2. Save Up Cash

You can generally expect to negotiate a settlement offer of up to 50% of the balance owed. But you can’t offer money you don’t have. Making a negotiation and failing to follow through could result in more damage to your credit scores and greater risk of being sued. So it’s best to try negotiating after you save some cash.

Some creditors may be open to a monthly payment plan instead of a lump sum. However, a payment plan can backfire. Your negotiation could terminate if you miss a single payment and you’ll potentially give the collector a longer legal timeline to collect from you or sue you.

3. Prepare Your Offer

Next, call your creditor or debt collector. You may need to speak with a manager or find out if your creditor has a specific “financial relief” division you can contact.

Once you get through to the right agent, start with a low initial offer, around 20% to 30% of the balance, in order to leave room for negotiation. Remember, there is no guarantee they’ll work with you. If you’re not getting anywhere, you may want to call back and speak to another agent

4. Get It in Writing

Once you have a verbal agreement with your creditor, ensure that the deal is put in writing. This will provide proof of the arrangement if they decide to try and collect more money later, claiming they never agreed to the settlement. Before sending money, make sure you receive a letter or email with all the details of your debt account and your settlement arrangement.

5. Make Your Payment

The last step is to hold up your end of the bargain. Make your payment in accordance with your agreement and keep a paper trail. You can do that by sending a cashier’s check or certified check by mail and paying for a return receipt. From there, keep an eye on your credit reports to ensure the account status is updated.

How Does DIY Debt Settlement Impact My Credit?

The steps detailed above can help you bypass many pitfalls associated with professional debt settlement, but not all of them. The main pro of the DIY approach is that it moves faster, is much more affordable and low-risk than hiring a for-profit company. However, there are still cons.

The major con is damage to your credit scores. Although it’s not as severe when you use the DIY approach, here’s what you can expect:

• Every missed payment on loans and credit cards hurts your credit scores. If  you miss payments while saving up for a lump sum payment, your scores will take a beating. 
• Settled debt is reported as “settled” or “paid in full for less than the full balance” on your credit reports. These negative marks remain on your reports for seven years from the delinquency date.

In addition to credit damage, you may have to worry about a tax bill, whether or not your debt settlement is DIY. The IRS considers forgiven debt to be taxable income. Once you factor in the potential increase to your taxes, your settlement may not be as good a deal as it initially appeared. 

Is Debt Settlement Worth It?

DIY debt settlement has many advantages over professional, for-profit debt settlement, but that doesn’t mean it’s always a good choice. Anyone who pursues this option should prepare for potential credit score damage, tax liability and the possibility that their settlement efforts will not be successful. For many consumers, a debt management plan or other debt strategies could yield far more positive results.