How to Win at Debt Settlement Negotiations

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debt settlement negotiations

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Few things can feel as final as debt. It doesn’t matter whether the debt you carry afforded you an education, a roof over your head, or a desirable lifestyle. It’s a number that naggingly stays top of mind until it’s gone.

Turns out, though, that the debt number in your head might not be as final as you think. In fact, you can negotiate some debt down for significantly less than you owe. But the process isn’t always easy, and it’s not without risk.

Below you’ll find the strategies, benefits, and dangers of entering debt settlement negotiations.

Debt settlement negotiations for student loans

It’s hard to imagine student loans, which are extremely difficult to discharge in bankruptcy, as being a debt you can settle for a lesser amount. Nonetheless, they are.

Here’s what to do if you have student loan debt to settle.

How to negotiate your federal student loans

Federal student loans come with four settlement options. These become potentially available to you if you default on your student loans — although you should never default just to see if you can get a settlement. (It might be nice to pay less than you owe, but the unnecessary default will wreak havoc on your credit and is considered fraudulent.)

That said, if you’re already in default and unable to rehabilitate your loans, Student Loan Borrower Assistance illustrates a few settlement options:

  • All fees waived — you pay your principal balance and interest accrued but no fees.
  • Half your interest and fees waived — you’re responsible for the principal balance and 50 percent of the interest.
  • Ten percent of your principal balance and interest waived — you pay 90 percent of the principal balance and interest.
  • Discretionary settlement — terms will vary based on the servicer.

As for when the settlement is due, you can expect it to be almost immediately.

According to, you might need to pay within the next fiscal year or even within three months of the settlement agreement. On top of that, the IRS would consider the amount of debt you have settled to be taxable income — you might owe them money as well.

How to negotiate your private student loans

Private student loans are less regulated than federal student loans. The way you’d settle private student loans would likely be similar to the way you settle other types of debt. The short answer is that it depends on what your lender is willing to negotiate.

Again, the chances are that a settlement isn’t going to occur unless you’re already in default. From there, you’d reach out to your lender or the collections agency and see what kind of debt settlement negotiations they’re willing to offer.

One of your best chances at achieving settlement is if you have a lump sum of money. If your lender or collector knows that you could pay something on a defaulted loan, that’s a lot better to them than nothing.

If you don’t have a lump sum of money saved or a foreseeable tax refund, ask if they offer other settlement options. Perhaps they’d be willing to enter into a payment plan or even rehabilitate your loans. It certainly doesn’t hurt to ask.

Debt settlement negotiations for credit card debt

Even if your credit card debt doesn’t reach the levels of your student loan debt, the interest rates can make them feel like more of an emergency.

High credit card interest rates and minimum payment requirements can keep you in debt for years. If your credit card debt has gone far beyond your control, here are some settlement options.

DIY credit card debt settlement

Asking your credit card issuer or debt collector to settle your debt might seem intimidating. But remember that, in some ways, you have the upper hand.

After all, they want you to pay. You’re saying you want to pay, but you’re also showing that you can’t do so under the current agreement. Your willingness to proactively handle the issue shows a good-faith effort on your part.

Here are a few tips to help you prepare for the call, as outlined by the Consumer Financial Protection Bureau (CFPB):

  • Make your settlement proposal based on what you can afford — either in monthly payments or all at once.
  • When you look at your budget, make room for all of your expenses and the cost of creating or sustaining an emergency fund.
  • After you have your proposed settlement amount, contact your lender and explain your situation, as well as what you can afford.
  • If they agree to settle the debt, record the agreement and get it in writing before you make a payment.

Finally, when you talk to them, don’t give a sob story. Appealing to their sympathy might not be as effective as showing that you want to take responsibility for the debt and outlining how you can feasibly afford to do so.

Getting help with credit card debt settlement

If the DIY strategy gets you nowhere, you can try working with a debt settlement company to get help reaching a settlement agreement. Here’s what you can expect:

  • They will likely ask you to stop making payments on your card and put the monthly payment into a special savings account for 36 months or longer.
  • Collectors can still contact you and even sue for collections on the debt.
  • Your credit score will be negatively affected by the default.
  • You could accrue late fees and penalties for not paying each month.
  • Once you reach the amount saved that you and the debt settlement company have agreed upon, they’ll try to settle the debt by offering that amount all at once in exchange for forgiveness of the rest.
  • You can owe taxes on the settled debt.

Choosing this strategy could mean you will have to pay them a percentage of either your total debt or the amount settled. But keep in mind that these companies are not allowed to charge you a fee upfront, according to the Telemarketing Sales Rule.

How to spot a trustworthy debt relief program

If you’re willing to pay a fee to get your credit card debt settled (as well as tax on the settled debt), then make sure you carefully research potential companies. There’s no simple way to determine the trustworthiness of a debt relief program is trustworthy, but here are a few helpful guidelines.

  • Look up the companies with the Better Business Bureau.
  • Google their name and keep an eye out for negative reviews.
  • Ask them if they have a working relationship with your lender or debt collector — as that’s what can ensure success in your settlement.

The FTC offers a few more red flags to watch out for. Avoid anyone that does the following:

  • Charges an upfront fee
  • Says they’re a “government program” to get people out of debt
  • Offers any guarantees
  • Tells you to suspend communication with your debt collectors without telling you what could happen (such as being sued for collections)
  • Promises to stop collections calls
  • Claims to be able to suspend or prevent debt collections lawsuits
  • Makes a promise that you can settle for “pennies on the dollar”

And if you feel that the company is in any way not listening to you, or if their promises seem too good to be true, find a different company that you can trust or try again to enter debt settlement negotiations on your own.

When you can’t — or shouldn’t — settle your debt

There are going to be times when debt settlement simply isn’t an option.

As mentioned above, purposely defaulting on your student loans to pursue a settlement is a bad idea. Likewise, being sued for collections on your debt closes the settlement window. The courts have determined what you owe and by when — you could even endure wage garnishment.

And if for some reason you have the funds to cover the entirety of your debt, then settlement won’t be an option for you since you can no longer prove financial hardship. This is true even if you’ve received money suddenly or unexpectedly.

Luckily, you have other choices. For example, if you have federal student loan debt, then you can take advantage of options such as income-driven repayment plans. And for other types of debt, you can see if your lender will negotiate with you for a temporary deferment, forbearance, or even a revised payment plan while you get your finances back on track.

If all else fails, bankruptcy is an option

If negotiating your way out of debt doesn’t work, or if you have collateralized debt such as a home or car (in which case, settlement is not likely to be an option), you might consider bankruptcy. However, it’s not something to be taken lightly — and, if you have student loan debt, you probably won’t win your case unless you can prove undue hardship.

Douglas A. Boneparth, a financial planner who runs the advisory firm Bone Fide Wealth and co-authored “The Millennial Money Fix,” explains why:

“Declaring bankruptcy is an option of last resort. Because it is so dramatic and so extreme, it really should be dealt with on a case-by-case basis.”

In other words, there’s no one way to know if bankruptcy is right for you. While a debt settlement can show up on your credit report for seven years, a bankruptcy will show up on your credit report for seven to 10 years:

  • Seven years if you file Chapter 13 bankruptcy and pay a portion of your debt
  • Ten years if you file Chapter 7 bankruptcy and don’t pay any of your debt

Bankruptcy isn’t impossible to come back from, but it is a big decision.

If you’re considering this option, contact a lawyer to evaluate your specific situation, the costs the proceedings will incur, and whether or not you’re a likely candidate.

Interested in a personal loan?

Here are the top personal loan lenders of 2019!
LenderAPR RangeLoan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.990% APR to 16.240% APR (with AutoPay). Variable rates from 5.75% APR to 14.60% APR (with AutoPay). SoFi rate ranges are current as of March 18, 2019 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.75% APR assumes current 1-month LIBOR rate of 2.50% plus 4.28% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
    See Consumer Licenses.
  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.
  5. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (

2 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.

3 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate DisclosureFixed interest rates from 6.79% – 20.89% (6.79% – 20.89% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

5 Important Disclosures for LendingPoint.

LendingPoint Disclosures

  • Loan approval is not guaranteed. Actual loan offers and loan amounts, terms and annual percentage rates (“APR”) may vary based upon LendingPoint’s proprietary scoring and underwriting system’s review of your credit, financial condition, other factors, and supporting documents or information you provide. Origination or other fees from 0% to 6% may apply depending upon your state of residence. Upon LendingPoint’s final underwriting approval to fund a loan, said funds are often sent via ACH the next non-holiday business day. LendingPoint makes loan offers from $2,000 to $25,000, at rates ranging from a low of 9.99% APR to a high of 35.99% APR, with terms from 24 to 48 months. The loan offer(s) shown reflect a 28 day payment cycle which is being offered as a courtesy as many of our customers are paid on a biweekly schedule and thus this may better align the loan payment dates with your actual income receipt schedule.

6 Important Disclosures for LendingClub.

LendingClub Disclosures

All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.

†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at

**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.

7 Important Disclosures for Earnest.

Earnest Disclosures

  1. Earnest does not lend in Alabama, Delaware, Kentucky, Nevada, or Rhode Island.

8 Important Disclosures for Avant.

Avant Disclosures

* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.

** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Your loan terms are not guaranteed and are subject to our verification and review process. You may be asked to provide additional documents to enable us to verify your income and your identity. This rate includes an Autopay APR reduction of 0.5%. By enrolling in Autopay your payments will be automatically deducted from you bank account. Selecting Autopay is optional. Annual Percentage Rate is inclusive of a loan origination fee, which is deducted from the loan proceeds. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. All loans made by WebBank, member FDIC. Please refer to Upgrade’s Terms of Use and Borrower Agreement for all terms, conditions and requirements.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.

5.75% – 16.24%1$5,000 - $100,000

Visit SoFi

7.46% – 35.99%$1,000 - $50,000

Visit Upstart

7.99% – 35.89%*$1,000 - $50,000

Visit Upgrade

5.99% – 24.99%2$5,000 - $35,000

Visit Payoff

5.99% – 29.99%3$7,500 - $40,000

Visit FreedomPlus

6.79% – 20.89%4$5,000 - $50,000

Visit Citizens

9.99% – 35.99%5$2,000 - $25,000

Visit LendingPoint

6.95% – 35.89%6$1,000 - $40,000

Visit LendingClub

6.99% – 18.24%7$5,000 - $75,000

Visit Earnest

9.95% – 35.99%8$2,000 - $35,000

Visit Avant

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

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