How to negotiate a debt settlement

Negotiating outstanding debt can speed up payoff but can come with fees and credit risks

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For people who have a lot of debt and can’t feasibly pay it off in a timely manner, debt settlement may be an option. Broadly, debt settlement is the act of negotiating your debt balance and repayment with your creditors. There are different ways to go about this.

It’s important to understand the differences between debt settlement and other debt-related programs like debt consolidation, debt management plans and debt forgiveness. Each method helps people become debt-free, but there are pros and cons to each of these.

Key insights

Debt settlement involves directly negotiating with creditors to lower balances or working with debt settlement companies.

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Negotiating a debt settlement may offer financial relief, but this may not outweigh potential fees and damage to your credit.

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You may be able to negotiate a debt settlement on your own by contacting individual creditors to ask them for relief.

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What is debt settlement?

Debt settlement typically involves negotiating with creditors to pay less than the full amount owed, often resulting in a lump-sum payment,” said Cameron Burskey, managing director at Cornerstone Financial Services.

If you’re over $10,000 in debt and cannot make your payments, you may consider working with a debt settlement company. These companies usually require that you stop payment on all applicable debts while they try to negotiate your balance down.

The Consumer Financial Protection Bureau (CFPB) cautions that these firms cannot guarantee a debt settlement. That, combined with the fees they charge, makes debt settlement companies a last resort.

You can also conduct your own debt settlement process by contacting individual creditors yourself. This may be more successful if you’ve already missed a few payments so the creditor is more willing to negotiate, believing partial payment is better than no payment at all.

You may also benefit from credit counseling, which typically means meeting with a credit counselor at a low cost or for free. This person helps you examine your finances, learn how to better manage your money and plan for handling the debt to move forward. Some credit counselors recommend a debt management plan (DMP) to help you get out of debt.

Pros and cons of a debt settlement

Debt settlement isn’t a quick fix for your debt problems, and working with debt settlement companies does have downsides. Be aware of the pros and cons of debt settlement before pursuing this path.


  • Helps people avoid bankruptcy.
  • Borrowers could pay less than the original amount owed.


  • Credit scores will drop.
  • Not all creditors negotiate with debt settlement companies.
  • Fees for debt settlement can be high.
  • Debt settlement companies can’t guarantee success.

» COMPARE: Debt settlement companies

Steps to negotiate a debt settlement

If you’re considering a debt settlement, you need to make a game plan. Ideally, don’t negotiate a debt settlement unless you’re highly unlikely to be able to pay your debt in a reasonable amount of time. In particular, if you’re facing potential bankruptcy, debt settlement is preferable as a means of lowering your debt burden without the costly and time-consuming process of bankruptcy.

Assess your financial situation

The first step in making any major financial decision like debt settlement is to take a close look at your finances. You need to have a clear picture of what you owe and how much you can afford to put towards your debt each month.

As Burskey noted, creating a realistic budget is essential to managing your debt. Determine how much you can put toward debt repayment each month and compare that to your current payment plan.

Prepare for negotiation

If you’re struggling to pay the minimums on your debts each month and don’t anticipate increasing your income in the near future, you may need to negotiate. A creditor such as a credit card company may consider negotiation in order to recoup some of what you owe if the alternative is losing their money due to bankruptcy.

Before you negotiate any debts, verify your outstanding balance and the current minimum payment for each individual debt. Then, figure out how much you can realistically pay and don’t send money unless you’re certain the debt is legitimate and not zombie debt.

Contact your creditors

If you’ve missed payments, you are likely already hearing from debt collectors, but if not, you can typically call your creditors yourself and ask them about debt settlement options. You might also ask whether the creditor has a hardship department. Do not provide personal information such as banking login data.

With creditors like credit card companies, you might negotiate not only the total balance owed, but also the interest charges and other fees. Whatever type of negotiation you offer or consider, be sure it works for you.

Choose a negotiation method

There are several ways to conduct a do-it-yourself negotiation, according to the CFPB. You should examine your finances and decide whether you’ll propose a monthly payment or a lump-sum payment to settle the debt. Be sure this is affordable for you and get the agreement in writing before sending any payment.

Finalize the agreement

Proceed with caution in any debt settlement plan. With each creditor or debt collector, written documentation is key. “There's a risk of being pursued by creditors or debt collectors for the remaining balance if the negotiated settlement isn't properly documented or paid,” explained Burskey. Secure that paperwork before sending payment, and keep careful records of every settled debt.

Be aware that when you settle a debt, it doesn’t go away. The CFPB notes that forgiven debt may count as taxable federal income, so consulting with a tax advisor or attorney is wise. Plus, the fact that you settled a debt will remain on your credit report for up to seven years from the first missed payment, or up to 10 years if your account is marked “closed paid as agreed,” according to Equifax.

» MORE: Credit counseling vs. debt settlement

Could your debt be reduced or forgiven? Take our financial relief quiz.


    Can I negotiate a debt settlement on my own, or should I hire a professional?

    You have the right to negotiate a debt settlement directly with a creditor in order to pay a lesser amount and have the debt settled. Given the CFPB’s warnings that debt settlement companies may actually worsen some people’s debt, negotiating on your own behalf is a viable option.

    What are the potential impacts of a debt settlement on my credit score?

    As Burskey noted, “Debt settlement can result in a negative impact on credit scores, making it more challenging to access credit in the future.” This can happen because you typically stop payments while a debt settlement company negotiates a settlement. However, your credit also suffers if you’re missing payments, so in those cases a settlement is likely preferable.

    Can all types of debt be settled through negotiation?

    Certain types of secured debt, such as a mortgage or car loan, may not be settled through negotiation methods. If working with a debt settlement company, be aware in advance of which debts are applicable to a settlement.

    Bottom line

    Debt settlement can help borrowers who are unable to pay their debts in full, but there are many considerations, such as damaged credit and fees to debt settlement firms. These drawbacks mean you should leave debt settlement, even a do-it-yourself version, as a last resort. Working with a nonprofit consumer credit counselor may help you find relief without incurring as much risk.

    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Consumer Financial Protection Bureau, “How do I negotiate a settlement with a debt collector?” Accessed March 3, 2024.
    2. Consumer Financial Protection Bureau, “What is a debt relief program and how do I know if I should use one?” Accessed March 5, 2024.
    3. Equifax, “How Long Does Information Stay On My Equifax Credit Report?” Accessed March 7, 2024.
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