What Is DIY Debt Settlement?
Do it yourself (DIY) debt settlement means negotiating with your creditors on your own to reduce the amount of debt that you owe. You offer a lump-sum payment for a portion of what you owe in return for the company forgiving the rest.
Don’t get too excited, though, because debt settlement isn’t just a sneaky way to avoid paying your full balance despite having the financial resources to do so. Banks and debt collection agencies only consider debt settlement to be a “something is better than nothing” proposition. They usually won’t even entertain the idea unless you’re already in default (180+ days late on your payments).
Steps to Negotiate a Debt Settlement on Your Own
1. Do your research.
As with any negotiation, you’ll need a certain level of foundational knowledge before you begin. You’ll need to understand the options at your disposal, how debt settlement works, what your bank can and cannot realistically threaten during negotiations, and how different actions may impact your liability. That way, you can negotiate confidently and ensure that you aren’t intimidated into a bad deal.
2. Figure out what you can afford to pay.
Your pre-negotiation research must include a thorough audit of your financial situation. In other words, how much do you owe across all of your credit card and loan accounts, how far behind are you on payment, and how much disposable income do you have? You can then use this information to identify the maximum lump-sum payments that you can afford to make.
3. Research other people’s experiences with the party handling your debt.
You can figure out who is handling your debt by referring to the most recent notice you received. This research will give you an idea of what has and has not worked with your creditor or debt collector. Make a list of successful methods that you can apply yourself.
4. Withhold payments & begin saving.
Continuing to make payments on already-defaulted debt is the last thing that you want to do when preparing for settlement negotiations. This will simply extend the statute of limitations on amounts owed as well as tell your creditor that you can still afford to pay – neither of which is good.
Instead, you should place your would-be payments in a bank account in order to build-up a nice lump-sum amount that you can offer to your creditor as a potential settlement.
5. Evaluate alternatives.
In order to maximize your debt settlement savings, you’ll need to have a few other backup plans that you can at least reference when dealing with a creditor. Being able to knowledgeably discuss the possibility and implications of bankruptcy, using your funds to pay off another debt obligation, etc., will hopefully scare the creditor enough to accept a decent offer. You may even want to schedule a free consultation with a bankruptcy attorney, as this will certainly beef up your knowledge base.
6. Make a plan.
You should never enter any negotiation without a well-defined plan. When it comes to debt settlement discussions, you’ll need to determine the minimum amount you’re willing to pay and maximum settlement you can afford to make (we recommend a range of 30% to 80% of what you owe). You’ll also need to figure out how quickly you’ll be able to pay and what assurances you’ll need from your creditor in order to finalize an agreement.
7. Gather all the information you’ll need to negotiate.
It’s best to compile your background information, financial records, and plan of attack in a folder that you can reference when dealing with your creditor. Armed with that information, you can begin the debt settlement process in earnest.
8. Leave emotion at the door.
Before calling your creditor or debt collector, take a second to collect your thoughts and remind yourself how important civility will be to achieving a positive result. Allowing your emotions to get the best of you (which is understandable in this type of situation) will only be counterproductive and may even lead your creditor to pursue legal options with additional gusto. Friendliness can go a long way in negotiations.
9. Contact the party handling your debt.
Explain why you’re finding it difficult to make payments, emphasizing any factors out of your control, like the loss of a job or sudden medical bills. Express your desire to pay what you can, just with a little flexibility.
10. Present your initial offer.
Present your lowest offer first. Explain why it’s mutually beneficial. Your starting bid shouldn’t be your final bid – not only because your creditor will likely counter it, but also because you want to at least give yourself a shot at a more favorable deal.
Your starting bid shouldn’t fall outside the realm of possibility either, as this may lead your creditor to dismiss your offer and end the negotiations right away. That’s why we recommend offering at least 30% of what you owe initially.
11. Listen to counteroffers and negotiate.
If the company does not accept your initial offer, continue to negotiate and present your own counteroffers. For additional leverage, make it clear that you are prepared to explore alternatives such as bankruptcy if you are unable to reach a settlement agreement.
12. Don’t exceed your maximum.
It’s common for consumers who are seeking a DIY debt settlement agreement to succumb to pressure from their creditors and agree to make a lump-sum payment that they cannot afford. Failing to abide by the terms of a debt settlement will only anger your creditor and increase the odds of a lawsuit.
13. Get an agreement in writing.
When you ultimately arrive at a debt settlement agreement in principle, it’s vital that you forgo submitting payment until your creditor sends you a signed debt settlement letter that clearly lays out the terms of your agreement. This letter should detail the amount you’ve agreed to pay, the date by which you are required to submit payment, and assurances that your creditor’s demands have been satisfied in full as long as you abide by the terms of the agreement.
14. Pay what you owe.
After a signed debt settlement letter is in place, all that’s left is to uphold your end of the bargain by submitting the required payment by the due date. Once you’ve done that, be on the lookout for a letter from the IRS explaining your tax liability for the forgiven debt (it’s considered income) and then review your credit reports a few months later to make sure changes to your account are properly reflected.
DIY Debt Settlement vs. Using a Debt Settlement Company
| Category | DIY Debt Settlement | Debt Settlement Company |
| Who does the negotiation? | You | Professional negotiators |
| Do you have to be in default? | Yes | Yes |
| What is the cost? | Your lump-sum payment | Your lump-sum payment plus potentially expensive fees |
| What is the main benefit? | Lower cost | Industry connections and experience |
| What are the main drawbacks? | You have to do everything yourself | The cost and the potential for scams |
| Are results guaranteed? | No | No |
Negotiating your own debt settlement is a cheap way to resolve your debt, but you can also consider using a debt settlement company. There are a few different types of companies that operate in the debt settlement space, including non-profit consumer advocacy groups, law firms, and a range of debt repair services. Not every company touting an ability to work wonders on your debt situation can actually follow through on that promise, however.
Predatory Debt Settlement Companies
Predatory debt settlement companies have become a major issue in recent years, as their prevalence has grown in direct accordance with the rising number of severely indebted consumers looking for a way out. For-profit debt settlement companies have become infamous for a variety of different unsavory practices, including:
- Focusing more on getting new customers to sign up and pay fees than actually helping existing customers.
- Failing to properly disclose account terms.
- Conflict of interest issues.
- Charging fees of around 15%-25% of what’s owed before even beginning any work.
- Embezzling consumer payments that should be put in escrow until submitted to the creditor.
- Guiding customers to default and ruined credit without their knowledge or direct consent.
- Promising wildly unrealistic results.
What’s more, there’s typically very little that a debt settlement company can do to improve your financial situation that you can’t handle yourself.
Debt settlement companies can’t minimize the credit score damage resulting from past-due debt. You have to be in default to be eligible for a debt settlement, and the damage will already be done by that time. They likely won’t save you much money either. Creditors won’t forgive more than a predetermined amount of debt, and most debt settlement companies charge for their services.
Pros and Cons of Debt Settlement Companies
The only things that debt settlement companies may bring to the table are industry connections and objective negotiating skills. These potential positives typically won’t outweigh the disadvantages of hiring a debt settlement company, which is why many folks decide to handle debt settlement negotiations themselves.
That said, some nonprofit organizations may genuinely provide help for free, and some law offices may at least give you a free consultation – though they’ll charge if you actually ask them to negotiate on your behalf. It may be worth getting a free consultation from a lawyer or credit counseling from a nonprofit before then negotiating a settlement on your own.
“Inexperienced negotiators should inform themselves of their legal rights and the negotiating norms before plunging in solo. They can do this by consulting a lawyer. Or, some court/bar programs have free legal advice (and even representation) for debtors.”
– Lela Porter Love – Director, Cardozo Mediation Clinic, Benjamin N. Cardozo School of Law
Bottom Line
Negotiating your own debt settlement is a worthwhile option, as there are very few unique benefits that a debt settlement company can offer. However, there are a few key things to keep in mind before trying to settle:
- Negotiating a debt settlement yourself is a lot cheaper than working with a debt settlement company. Many debt settlement companies are outright scams.
- You must already be in default for a creditor to even consider a debt settlement in most cases.
- To settle a debt, determine how much you can afford to pay in one lump-sum, negotiate with your creditor without exceeding that maximum, and strive for a deal that satisfies your debt while eliminating the threat of a lawsuit.
- You’ll typically only be able to settle debts that are unsecured, meaning those without collateral. With secured debts, your creditor will just keep your collateral as reimbursement if you don’t pay what you owe. For example, if you don’t pay your car loan, your vehicle can be repossessed.
If you can’t reach a mutually-beneficial agreement, you should consider other options such as debt consolidation or a debt management program. If all else fails, you may need to consider bankruptcy or simply try to wait out the statute of limitations on your debt and hope you don’t get sued.
You can learn more about your eligibility for a debt settlement by checking out our Debt Settlement Guide.
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