How to Win at Debt Settlement Negotiations

debt settlement negotiations

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.

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