8 Simple steps to settle and reduce debts on your own

It's difficult to accept the fact that you're in debt. It may seem all the more difficult to negotiate with debt collectors, especially if you fear the scare tactics often used by them. You can work with professionals to settle your debt. However, it is not that intimidating to follow a few steps and bring down the outstanding balance on your own.

Why does it make sense to negotiate on your own?

DIY or do it yourself debt settlement makes sense because:

  • It's a practical solution since no one else knows your financial situation better.
  • It's a viable option since you don't have to pay any additional fees.
  • You don't have to waste time in searching for legitimate settlement companies.
  • You won't have to live in fear that you'll get scammed.
  • Creditors are more comfortable in working with you.

Several professional companies have gained bad reputation in the last few years because of the following reasons:

  • Having the objective of attracting more customers rather than assisting debtors.
  • Intentionally or intentionally not disclosing the actual terms and conditions of the agreement.
  • Making impossible promises to make more money.
  • Charging fees even before working with creditors.
  • Misrepresenting facts to debtors and compelling them to miss out payments.

When does the Creditor say 'yes' to debt settlement?

  1. Creditors are often seen to agree with debt settlements because they feel it is their only way to get back their money. The creditors feel that some amount of money is better than nothing. Don't ever bear the misconception in your mind that the creditor has agreed to settle your debts because he is basically a nice person.
  2. Another indirect way by which you can influence the creditor to settle your debts is by hinting, that bankruptcy is the only other option left for you. However, it is not easy to convince them all the time. The creditors have their own ways to determine the authenticity of your financial condition.

What makes the creditor say 'no' to debt settlement?

There are several factors for which the creditor might disagree to settle the debts:

  1. You are current on your payments: If the creditor finds that you are in a good standing for all the accounts of your credit report, then it is almost impossible to convince him of a debt settlement. If you warn the creditor of some future happenings like loss of job or medical emergency they hardly get convinced. There is a fair chance to convince them if you have a valid documentation which shows that your financial situation is insecure.
  2. Your account has been active recently: Recent activity in your account like making charges and payments may make your creditors increase your settlement amount to a considerable extent.
  3. Sue you to recover the money: Another case where the creditor can refuse to settle debts with you is, if they have a legal upper hand to sue you. If they suspect you of making big bucks or enjoying a lot of assets, they have the right to drag you to court and garnish your wages. This can be done in less money than making a deal with you. Most probably you will be sued under such conditions.
  4. Low settlement over an extended period: There is a limit to lowering and stretching your payment scheme. Most creditors will not agree to go for a 30% settlement offer payable over five years. They feel cheated and don't have any idea of what prevents you from sparing such a small amount. In such cases they want to avoid another hassle with your account. In case you offer them a full payment settlement offer they might agree over an extended period.

How can you settle debts on your own?

You can settle debts on your own in the following ways:

Have a basic knowledge:

You need to have at least the basic knowledge about your debt situation for initiating the negotiation process. You can gain the basic knowledge from your credit report and the available balance in your checking account.

You'll need to go through all the financial documents. Have the basic idea about what debt settlement is, what your creditors or collectors can or can't do during negotiations, how various actions may make it easy for you to negotiate with creditors and get back your financial freedom fast.

Make a draft of the plan:
Once you've acquired knowledge about your credit situation, its time to prepare your own settlement plan on the basis of the following factors:
  • The number of your past due accounts
  • How much you've to pay your creditors
  • The amount you earn every month

Decide the maximum amount you can pay on each account. This will be extremely helpful when you start the negotiation process.

Create a back-up plan:

It'd be a mistake to create only one settlement plan. Create a few backup plans too. If the plan A doesn't work, then use the plan B. Consider some other debt relief plans too.

Look at the alternatives:

If your creditor is not happy with the offer, then make a counter-settlement offer soon. Let the creditor know that you're contemplating bankruptcy if all the options to settle debts are closed.

Stop making payments and save:

Making payments to your creditors basically indicate that your financial situation is good. They'll think that you can afford to pay off the debt.

If you want your creditors take your settlement offer seriously, then what you need to do is stop making payments on the delinquent accounts. Save that amount in an account. You need to save a sizeable amount in order to make reasonable settlement offer.

Make a low bid initially:

Don't think that creditors will accept your very first settlement offer. Your starting bid should be low as creditors are most likely going to counter it.

If the creditors accept your first offer, then you'll certainly get a very good deal. Make sure you don't make a too low bid as creditors may reject your settlement offer altogether.

Don't succumb to pressure:

A lot of times, debtors are forced by creditors to accept an offer that is beyond their affordability. Try to avoid succumbing to pressure for it won't be good for your financial health. On the other hand, find out your chances of getting sued by the creditors. Make a decision on the basis of that.

Get a written agreement:

Once you've had a final discussion with creditors, get a written agreement from them wherein the terms and conditions of settlement are clearly written. Check if the payment date and the settlement amount are clearly stated in the agreement.

What are a few tips to reduce debts on your own?

Here are the few tips that you can use to settle debts with creditors.

  • Use a debt calculator and find out how much you can pay to your creditors.
  • Have immense patience since several creditors may not be easy to work with.
  • Prepare a budget and start saving money.
  • Forget about your wants and focus only on your needs.
  • Save an amount in the emergency fund so that you can be debt free fast.
  • Organize your debts by listing your debts, creditors, how much behind on payments, missed payments.

Steps to negotiate with collection agencies for settling debts

Step 1

Offer them a percentage of the debt amount you owe. In return, ask them to delete the negative listing from the credit reports filed with the three major credit bureaus. You should make the offer in writing. Collection agencies normally buy debts from the original creditor, and the former creditor will be out of the picture once the debt is transferred. The debt used to be sold to the collection agency to receive tax benefits under federal law. If you anyhow want to contact the original creditor, the creditor or his representative will not talk to you, or they’ll suggest you to communicate with the agency.

Step 2

You can start the offer at 25% or less than the total debt amount. The collection agency will get a profit at 25%. For example, if your debt is $2,000, and the collection agency has given about $140 for the total debt, you can offer 25%, or $500. The collection agency will get a profit of $360 straight.

Step 3

Don’t talk to the collection agency over the phone. Rather, keep all communications limited to letters, which must be sent by certified mail, to create a paper trail. You can also use e-mails to send document copies.

Read more: 4 Simple guidelines to deal with debt collectors

Step 4

You must ask the agency to validate your debt. You must make it sure that the agency must show you the limits of the Fair Credit Reporting Act, which proves you owe them. Collection agencies must validate any debt they attempt to collect as per FCRA rules.

Step 5

Inform the agency by a clearly written letter that you wish to settle the account as soon as possible, rather than filing an expensive lawsuit. Remind the agency about the percentage you have offered. You can negotiate again, make sure you start the negotiations with the lowest number possible. You can increase your offer at any point in time, but cap your offer at 50%.

Step 6

Mail the letters and keep a copy for yourself. Make sure you use a certified mail service to send any letters. Don’t accept any follow-up counter-offer through the phone from them. After getting the signed letter from them that your offer is accepted, submit a cashier’s check or money order to them. Don’t forget to follow up with the collection agency if it doesn't change the account status on your credit report. Provide copies of your settlement letter, mail receipts, and other documents and keep pushing the collections agency to end the deal as soon as possible to avoid a lawsuit.

Step 7

Review your budget before offering too much. When you can determine your affordability, start your negotiations. When you’re negotiating with a collector, make sure you’re not revealing bank account numbers, place of employment, or any references.

Step 8

Collect the details of the agreement in writing before you pay off the collection agent any money. It's also a wise decision if you can hire a consumer law attorney, he can properly review the agreement. Your agreement must clearly cover the below-given points:

  • How much amount you have decided to pay.
  • Whether you will pay the settlement amount in installments or in a lump sum.
  • What will be the due date of every payment?
  • What will be the mode of payment(s), such as - electronic bank transfer or a cashier's check?
  • The debt collection agency must report to the credit bureaus that your debt has been "paid in full", as soon as the agency receives the settlement amount.
  • Any concessions from the debt collection agency.
  • Conditions that’ll breach the agreement and the outcome of the breach.

Things to know while going for DIY settlement

1. Keep your evidences safe

All formal interactions with the creditors, verbal or written, should be recorded after taking prior permission and checking the rules of the state. You can note down the date and other details of the phone call. Keep a copy of all letters you receive or send. Once the creditors agrees and negotiates your debt to a certain amount, ask them to send it in writing. It's important to get it all written as they might not agree to it later, after all the effort and time devoted to it. You should pay once you've a written agreement with your creditor in hand. Sign and put the date in the agreement just as you would do in a contract. Always use a certified mail.

2. Pay on time

It's very important to pay your settlement amount on time. Don't make your creditors angry after so much negotiation. Make sure you don't give them your personal information, like bank account details, routing numbers, debit card numbers, etc. You should pay only by using money order or cheque and send it by a certified mail. The debt settlement process is very stressful. Your phone might ring off the hook and the conversation might be intimidating. The key solution to a successful DIY debt settlement is firmness along with politeness. Although debt settlement does have an effect on your credit report, it's better than filing for bankruptcy.

Final word

Last but not the least, do remember at least 3 things about debt settlement.

  • You've to pay an extra amount for the amount forgiven by creditors. You'll have to pay tax to the IRS.
  • Your credit score may fall as you're not making the full payment to the creditor.
  • Usually, creditors are willing to work with you when the account is delinquent.