Sense & Centsibility Blog
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Settling Your Debt on Your Own: Tips and Precautions

As a financial counselor, I am often asked about the best way to deal with debt. A few common questions include, “Can I just settle on my debt?” and “Should I hire a company to fight for me to get the best settlement?” In this blog, I will address those and other questions, using material from a recent blog post by Bruce McClary from the National Foundation for Credit Counseling®  (NFCC) entitled, “How to Negotiate Debt Settlement on Your Own and the Impact to Your Credit Score.”

Timing is Everything

First, let’s talk about the timing of a debt settlement. If you are still current on your credit cards and/or unsecured loans and trying to settle your debt, you won’t have much luck. In the creditor’s/lender’s eyes there is no good reason for them to settle on the debt. Full, on-time payments will lead to the debt being paid in full. Therefore, a creditor will almost never initiate a debt settlement; you are almost always the one who must initiate the process.

Also, your credit cards/loans might be eligible for a Debt Management Plan (DMP) through LSS Financial Counseling, which is a simple and “credit-friendly” approach to paying off your debts in full more quickly!  

Beware of Debt Settlement Companies

If you pay a “debt settlement” or “debt relief” company for their assistance in eliminating your debt, will they deliver a good settlement? Unfortunately, the answer is generally no. After paying a large start-up fee and/or ongoing monthly fees, these companies often require you to stop making payments to your creditors. This means missed payments and a severe, negative impact on your credit. Once you have consistently missed payments, you will eventually be considered in default on your credit card/loan. Default is when the opportunity for a settlement first occurs.

This is where the debt settlement/relief companies claim to excel with their “negotiating” skills to fight hard with the creditors to settle. But this is at an ongoing cost to you, which, as I’ll detail below, you can do yourself – for free. Also, results are often not as advertised. If you owe more than one creditor, syncing up settlements with all of them is difficult and it is often months, if not years, before you see any results.

How to Settle Debts on Your Own

The following debt settlement tips are from the NFCC article I mentioned above.

1) Research who you owe

Do an internet search about your creditor, lender or collection company. See what information exists on how they approach debt settlement. Do they even allow it? If so, are they generally with good terms, or do they make unexpected, last-minute changes to any agreement?

2) Money talks

The shorter the pay off period, the more likely your lender/creditor will accept a lesser dollar amount than what is owed. For instance, it’s more enticing to the company if you offer to settle the debt immediately with one lump-sum payment instead of making smaller payments over a period of months or years. The collection company/lender/creditor wants the debt paid and off their books ASAP. Also, collection companies have deadlines and quotas to meet by the end of the month or end of the quarter. Use this to your benefit for a better deal!

3) Be ready to negotiate

It is not unrealistic to expect a 40 to 50 percent “discount” with a settlement, meaning you would pay 50 to 60 percent of the total debt balance. That being said, it doesn’t hurt to start with a lower offer and see if the company accepts. For instance, offer to pay 30-35 percent of the debt balance. If the company doesn’t accept, they will likely make a counter offer. That means that you can counter their counter offer. However, if it seems like a good deal, they are willing to accept it, and you can afford it, don’t push your luck negotiating over a small amount of money.

4) ALWAYS get something in writing

Even if the company offers a settlement, without a paper trail there is no evidence it occurred. And if there was a clerical error and the company were to proceed with collection activity, it would be your word against theirs.

5) Stick to the agreement

Don’t offer something that you can’t afford to pay. They will lose trust and patience with you, and they could possibly continue the collections process and pursue a judgment against you, which may result in wage garnishment or bank levy.

6) Consequences after the settlement

Once settled, your credit report will often say “settled for less than what is owed” for that particular debt. This wording is not as good as “paid in full,” but it will stop a perpetual hit to your credit report due to missed payments, and you no longer have to worry about that debt.

Besides the impact on your credit score, settlements will most likely have tax consequences for any forgiven debt. This is because on paper you were given a certain amount of money with the original debt. Since you did not pay back everything that you owed, this difference is money that you technically “earned” and is considered taxable.

A final point: you might not be able to avoid missing payments due to job loss, increased expenses and/or an income reduction. However, do not intentionally miss payments or go into default debt just to try to pursue debt settlement.  

Whether you’re making on-time debt payments, feel like you’re not making progress, or you have missed a payment or two, LSS Financial Counseling is here to help. All financial counseling sessions are free. Our experienced counselors will review your overall finances with you and provide realistic, actionable steps to help you reach your financial goals. Give us a call at 888.577.2227 or get all your support online at your convenience.

Author Dan Park is a Certified Financial Counselor with LSS Financial Counseling.