How to Negotiate Credit Card Debt Settlement Yourself

How Do Credit Card Debt Settlement Companies Work?

Credit card debt settlement companies, also sometimes called debt relief companies, negotiate with your creditors to let you pay less than you owe—but at the cost of high fees and no certainty that a settlement can be reached. Here's what to know:

• You'll save in advance for a settlement. Generally, you'll save money each month in a newly created bank account until you've saved enough for the debt settlement company to be able to make an offer to your creditors. This is risky: Many participants in debt settlement programs drop out before settlements have been negotiated on all their debts. The money in the account will always belong to you, but it can be inconvenient and put a strain on your budget to save for a settlement that does not come to fruition.
• Debt settlement companies charge significant fees. Typically, these companies charge fees that can total up to 25% of the debt you're hoping to settle. It's illegal to charge upfront fees for debt settlement under federal law, but some companies do so anyway. And while the company can't charge you fees until they've negotiated a settlement, you may incur other expenses, such as monthly maintenance fees on the account where you'll save for the settlement.
• They may require you to stop making debt payments. To put pressure on credit card companies to negotiate with them, a debt settlement company may tell you to stop making payments toward your debt. This will negatively impact your credit score and lead to late fees and growing balances.
• Results are not guaranteed. Credit card companies could decide not to accept an offer from the debt settlement company. It also may take years for the companies to agree to a settlement, during which time your debts will grow, fees will add up and you may be further from resolution than before.

Learn more >> Debt Settlement Myths Debunked

5 Steps to Negotiate Credit Card Debt Settlement

Debt settlement doesn't have to happen through a for-profit company. You can take care of the whole process yourself, which may end up being cheaper and easier.

You do have the option to get assistance from other, more reputable professionals during the settlement process. A credit counselor or a lawyer well versed in debt collection proceedings, for example, may give you important insight and confidence during the process. But even if you have some help, you'll likely still save money, and potentially protect your credit from deeper damage, by avoiding debt settlement companies. Here's what to do:

1. Confirm the Amount You Owe

First, double-check the amount of the debt you want to negotiate a settlement for. This is an important step, especially once your debt has gone to collections, since it can help ensure the debt truly belongs to you.

You can confirm what you owe by checking your credit report, or, if the debt is in collections, by verifying with the collection company the exact amount of the debt, the name of the creditor and other key details. By law, the company must provide you with this information in a debt validation letter either when they first contact you or within five days of that first communication.

If you don't believe you owe the debt, or if you believe you already paid it off, you can dispute the debt in writing with the debt collector within 30 days of receiving the debt validation letter. The company will then need to verify that the debt belongs to you, and it must also stop collection activities in the meantime. If you've already paid off the debt, you can send proof to the company.

Learn more >> How to Find Out What Debt You Have in Collections

2. Calculate How Much You Can Repay

Once you know how much you owe, consider what proportion of the outstanding debt you can afford to pay the creditor to settle the debt. Identify the amount that you can comfortably part with while continuing to pay your other debts and bills and cover important expenses, including saving for retirement. Setting up a budget plan can help.

You can offer to make either a single, lump-sum payment or to pay in installments. If you pay in installments, however, missing a single payment could put the agreement at risk, and you won't have the benefit of ending interactions with the collection agency.

It's common to offer to settle the debt for up to half of the amount owed. If you can't afford to make a lump-sum payment, offer to pay it over, say, 12 or 24 months. When deciding how much you can afford to repay, look at your average monthly income and spending.

Set aside money in a separate account just for your future debt settlement as soon as you can. If you'd prefer to make a lump-sum payment, which has real advantages, you'll likely need some time to save up for it.

3. Get Help From a Professional

If you find at any point that you're overwhelmed or unsure how to proceed, contact a nonprofit credit counseling agency for assistance. A credit counselor at an accredited organization can work with you to assess your debt and decide the amount you can afford to offer as a settlement. A wide range of credit counseling services are free or low-cost, and they are a reputable alternative to working with a for-profit debt settlement company.

You may also benefit from working with an attorney specializing in debt collection or consumer law. Depending on your finances, you may be eligible for free assistance. The Consumer Financial Protection Bureau offers a list of legal aid programs by state, plus additional resources on finding and vetting an attorney.

4. Contact Your Creditor

Next, contact the credit card company or collection company, depending on how far behind you are on payments. If your credit card payment is only a few days or weeks late, the credit card company may not be willing to negotiate a settlement with you. (At this stage, reach out to the company to discuss hardship programs or repayment plans to reduce your payments and keep you from falling further behind.)

Your payments may need to be at least 90 days past due for the credit card company to consider a settlement. Once your payment is 120 to 180 days late, the credit card company typically considers the debt charged off, or uncollectable, and sells it to a collection company. At this point, you have the option to settle with the collection company. You can contact them with your suggested plan of action once you have enough money saved in your personal settlement account.

You may have already gotten a settlement offer from the collection agency, which you can accept or respond to with an alternative. Share with the company the amount you can afford to pay and why you can't pay the debt in full. They may accept your suggestion or respond with a counter offer. If you're working with an attorney or credit counselor, they can help craft your offer and assess the company's response.

5. Agree to a Debt Settlement Plan

Finally, if you come to an agreement with the collection agency, ask for the arrangement in writing and follow through on your commitment by the due date. It's important for the written confirmation to state that your debt obligations are fulfilled by the settlement. Repeat this process with any additional accounts in collections, as you'll need to negotiate settlements for each account individually.

While settling a debt is better for your credit than not paying at all, you will still notice a negative impact on your credit scores. A "settled" notation will stay on your credit report for seven years from the date the account first became delinquent. This shows potential lenders that you did not pay the debt in full. Any late payments will also remain for seven years.

The Power of Settling Debt on Your Own

While debt settlement does have an effect on your credit, ending a struggle with credit card companies and collection agencies is worth it for many. Taking on the task without paying a debt settlement company—even if you have the help of a credit counselor or attorney—gives you all the benefits of settling debt without the potentially exorbitant cost. On top of it all, you may feel empowered to make other changes in your financial life, knowing you've succeeded in making your credit card debt more manageable on your own.