Debt Settlement: A Guide for Negotiation

If a creditor fears that a debt may have to be written off, all bets are off

Offloading all or a portion of your personal debt via settlement can seem like a daunting task when you feel like you're in over your head with debt. But one of the great truths in business is that everything is negotiable. Even when the price or terms of something seem set in stone, getting a discount is often as easy as knowing whom to ask and how to ask for it.

When it comes to the balances you owe on your credit cards, for example, there might be an opportunity to negotiate what you actually owe. With a little bit of knowledge and guts, you can sometimes cut your balances by as much as 50% to 70%.

Key Takeaways

  • Debt settlement is an agreement between a lender and a borrower to pay back a portion of a loan balance, while the remainder of the debt is forgiven.
  • You may need a significant amount of cash at one time to settle your debt.
  • Be careful of debt professionals who claim to be able to negotiate a better deal than you.
  • If you negotiate yourself, speak with a manager in the debt settlement department and start by offering 30% of your outstanding balance.

The Basics of Debt Settlement

Debt settlement is an agreement between a lender and a borrower for a large, one-time payment toward an existing balance in return for the forgiveness of the remaining debt. Someone who owes $10,000 on a single credit card, for example, may approach the credit card company and offer to pay $5,000. In return for this one-time payment, the credit card company agrees to forgive or erase the remaining $5,000 still owed.

Why would a credit card issuer willingly choose to forgo a substantial portion of the balance it is owed? It is usually because the lender is either strapped for cash or is fearful of your eventual inability to pay off the entire balance. In both situations, the credit card issuer is trying to protect its financial bottom line—a key fact to remember as you begin negotiating.

Credit cards are unsecured loans, which means that there is no collateral your credit card company—or a debt collector—can seize to repay an unpaid balance.

While negotiating with a credit card company to settle a balance may sound too good to be true, it’s not. Not surprisingly, lenders don’t like to advertise settlement, and although there are no independent statistics about success rates, the Federal Trade Commission (FTC) estimates that about half of debt settlement cases make it to completion. Still, if you’re severely behind on your payments and spiraling toward bankruptcy, your lender may be willing to take what it can get, giving you one last chance to get back on your feet.

The Downsides of Debt Settlement

Although a debt settlement has some serious advantages, such as shrinking your current debt load, there are a few downsides to consider. Failing to take these into account can potentially put you in a more stressful situation than before.


The amount by which you might be able to cut your balances by negotiating your debt.

First, debt settlement generally requires you to come up with a substantial amount of cash at one time. This is what makes the debt settlement attractive to your lender because, instead of receiving minimum monthly payments for the next few years, it’s getting a much larger payment now. You’ll need to stop and consider where the funds are going to come from and how that money could be used elsewhere in your personal finances, and you want to make sure a large payment now isn’t going to leave you in a tight spot a few months down the road.

Second, you risk having your credit card account closed completely after the settlement is complete. In other words, your lender may drop you as a client because of your poor track record of paying back what you owe.

Third, debt settlement can affect your credit score adversely. This, in turn, will make it harder for you to borrow money at good interest rates or even to get credit at all in the future. If you need a good credit score, but have the luxury of waiting for it to recover in a few months, consider debt relief instead.


Click Play to Learn All About Debt Settlement

Should You Do It Yourself?

If you decide that a debt settlement is the right move, the next step is to choose between doing it yourself or hiring a professional debt negotiator. Keep in mind that your credit card company is obligated to deal with you and that a debt professional may not be able to negotiate a better deal than you can. Furthermore, the debt settlement industry has its fair share of con artists, ripoffs, and scams, which is why many people choose to try it on their own first.

Debt settlement can adversely impact your credit score, making it more difficult to borrow money at affordable interest rates in the future.

Appearances Matter

Whether you use a professional or not, one of the key points in negotiations is to make it clear that you’re in a bad position financially. If your lender firmly believes that you’re between a rock and a hard place, the fear of losing out will make it less likely that they reject your offer.

If your last few months of card statements show numerous trips to five-star restaurants or designer-boutique shopping sprees, your lender will be unlikely to view you as being in need or worthy of sympathy. To raise your chances of success, cut your spending on that card down to zero for a three- to six-month period prior to requesting a settlement.

On the same note, if you’ve been making your minimum payment (or more) on time every month, you will look like someone who is attempting to walk away from your debt obligations. Your debt settlement offers should always be directed toward companies with which you’ve fallen behind on your payments.

The Negotiating Process

Start by calling the main phone number for your credit card’s customer service department and asking to speak to someone, preferably a manager, in the “debt settlements department.” Explain how dire your situation is. Highlight the fact that you’ve scraped a little bit of cash together and are hoping to settle one of your accounts before the money gets used up elsewhere. By mentioning the fact that you have multiple accounts on which you’re pursuing debt settlements, you’re more likely to get a competitive offer.

Offer a specific dollar amount that is roughly 30% of your outstanding account balance. The lender will probably counter with a higher percentage or dollar amount. If anything above 50% is suggested, consider trying to settle with a different creditor or simply put the money in savings to help pay future monthly bills.

Last but not least, once you’ve finalized your debt settlement with your lender, be sure to get the agreement in writing. It’s not unheard of for a credit card company to verbally agree to a debt settlement only to turn over the remaining balance to a collections agency. Be sure the written agreement spells out the amount you have to pay in order to have your entire balance excused from further payment.

The Bottom Line

While the possibility of negotiating a settlement should encourage everyone to try, there’s a good chance you’ll hear a “no” somewhere along the way. If so, don’t just hang up the phone and walk away. Instead, ask your credit card company if it can lower your card’s annual percentage rate (APR), reduce your monthly payment, or provide an alternative payment plan. Often your credit card’s debt settlement representative will feel bad for having had to reject your offer and may be willing to agree to one of these other options.

Finally, another strategy to consider, especially if you owe a lot across several credit cards, is debt consolidation.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Federal Trade Commission. "The Association of Settlement Companies (TASC) Study on the Debt Settlement Industry," Page 1.