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Does Debt Negotiation Really Work?

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In a Nutshell

Debt negotiation can work to help you settle your debts for less than you owe. But it only usually works with certain kinds of debts and with accounts that are several months late or nearing their statute of limitations. It may work better with a third-party debt collector than the original lender. To negotiate successfully, you'll need to know how much you're willing to pay and you'll need to be confident and persistent.

Written by Natasha Wiebusch, J.D.
Updated October 1, 2021

Debt settlement uses the process of debt negotiation to try to settle your debt for less than what you actually owe. When you settle a debt, the creditor or debt collector agrees to accept less than you actually owe as payment-in-full. Debt negotiation can work, but it works best if it’s right.

There are two different ways to negotiate a debt settlement. You either negotiate with your creditor (or creditors) directly, or you can hire a debt settlement company to negotiate for you. In this article, we’ll help you understand the debt negotiation process so you can negotiate a debt settlement on your own. 

What You Need To Know About Debt Negotiation: The Basics

In general, if you’re overwhelmed by late payments, late fees, or rising interest rates, you have several options to reduce your debt. You can either create a debt management plan on your own, pay an agency to help you settle your debt, contact a credit counseling agency, or file for bankruptcy. The best option for you will depend on your particular circumstances. 

So, before deciding how to deal with your debt, research each option to make sure you’re choosing the best debt relief solution for you. Here are some things to consider as you research your options.

You Can Only Negotiate Some Types of Debts

Your debt relief options will be related to what kinds of debt you have. Generally speaking, there are two different kinds of debt: secured and unsecured debt.

Secured debt includes home mortgages, car loans, and other loans that are secured by something of value. For example, if you get a loan to purchase a snowmobile and the snowmobile is used as collateral to secure the loan, this is a secured loan. If you don’t make the loan payments, the lender will have the right to repossess the snowmobile to satisfy the remaining debt on the loan. 

Secured debt typically cannot be negotiated down unless you are also willing to give the property back to the creditor. For example, if you owe a lender $5,000 on the snowmobile loan and the snowmobile is worth $4,000, the lender may agree to settle the debt by repossessing the snowmobile.

Unsecured debt, such as credit cards, store accounts, medical debt, and personal loans can be negotiated. It’s important to note that there are additional strategies you can use to pay off credit card debt, such as transferring a credit card balance to a transfer balance card, which has a temporarily low interest rate.

Although government-insured student loans are unsecured, they’re not negotiable. Some lenders try to convince student loan borrowers that debt consolidation is a good way to reduce student loan debt because it turns the loans into private loans, which are negotiable. Although consolidating federal student loans is an option, private loans don’t carry any of the other benefits that government loans carry.

It Matters How Late Your Debt Payments Are & What You Can Offer

If your debt payments are current, most creditors will not be willing to negotiate a settlement. Neither creditors nor third-party debt collectors have to accept any settlement offer from anyone at any time, so it’s really up to them. Many creditors won’t even consider settlement until your account is at least 90 days delinquent. 

Still, there are certain times when creditors and collectors are most likely to be open to settlement...

When You Miss Payments for Several Months

Generally, lenders will be more open to negotiating if you're already several months late. Although it will depend on the creditor, you’ll have a better chance of settling a debt with an original creditor when the debt is five to six months delinquent. This is when many creditors will start looking to sell the debt to a third-party debt collector.

Creditors are more open to settling debt when more time has passed because missing payments for many months shows that you likely don’t have the money to pay the creditor back. That’s why they’re more open to getting what they can now. 

When the Statute of Limitations for the Debt Is Near

Creditors are also aware that debt has a statute of limitations, which is when they can no longer sue you for the debt and get a judgment to collect it from you. As your debt gets closer to its statute of limitations, creditors may become more open to a settlement agreement. In this case, it’s in their best interest to accept some money rather than receiving nothing at all.

When the Debt Has Been Sold to a Debt Collector

Debts are often sold to third-party debt collectors for very little, so if you have the cash to make a lump-sum offer at this time, a debt collector may accept the offer.

Negotiation Requires Confidence, Persistence, and Follow-Through

If you’re negotiating a debt settlement on your own, you'll need to be comfortable and confident in your ability to negotiate with the creditor. This can be stressful, and some creditors will be more difficult to negotiate with than others. To get good results, you'll need to stand your ground, and agree only to terms that you can comfortably meet. Negotiations may take a lot of time and many phone calls, so don’t worry if you don’t reach an agreement after your first call. This is normal. Down the road, you’ll have to be persistent.

Unfortunately, while you’re negotiating your debt, your creditor can still move forward with the collection process. This means that you’ll probably still get collection calls or letters, your credit score will continue to suffer, and you could still be sued by the creditor. If the creditor gets a judgment against you, you may also be subjected to wage garnishment or have your bank account levied, even while negotiations are going on. 

Collection actions like these can be discouraging, but if you stay strong and the creditor is still interested in settling, then stick to your plan and make sure the creditor understands what you can and cannot promise.

Consider These Goals While Negotiating.

Two goals you’ll want to consider when negotiating a debt settlement are (1) the total amount you want to pay and (2) how your account is reported to the credit bureaus after the payment is made. 

Many creditors will settle for 40%-60% of the original amount you owe. A good strategy is to start low in your negotiation, offering to pay between 25%-30% of the total, but be willing to meet in the 50% area. 

Once you have an amount, negotiate with the creditor to report your account as “paid as agreed” to the credit bureaus, instead of reporting it as “settled debt.” Credit bureaus use this information to create your credit report, which is then used to calculate your credit score. When an account is “paid as agreed” it means that the full amount was paid, just like any other account that was paid off. “Settled debt” signals to credit bureaus that you weren’t able to pay the full balance, which negatively impacts your credit score.

Stick to the agreement!

If you reach an agreement with the creditor, you'll need to be able to follow through in making the agreed-upon payment or payments promptly — whether it’s a lump-sum payment or monthly payments. Typically, creditors only give you a short window to make the payment.

Debt Settlement May Have Consequences

Though it can be a relief to come to a settlement with your creditors and pay off an outstanding debt, doing so may have consequences on your credit score and taxes.

Credit Score 

The more time you spend negotiating a debt settlement, the larger the impact will be on your credit score. This is because typically, you won’t be making payments on the debt while you’re negotiating a settlement. For example, debt settlement companies typically request that you stop paying your creditor and make payments to them instead. The settlement company then sets the money aside in a savings account. When the balance is high enough, they begin making settlement offers to your creditors. 

The debt negotiation process, whether you do it on your own or through a settlement company,  can take months or even years to complete. During this time, your credit score will continue to plummet from the missed payments reported to the credit bureaus.

Taxable Income

Unless an exception applies, when creditors forgive any debt that is $600 or more the IRS considers it income. This will then be added to your tax return, which could raise your tax liability.

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Debt Settlement Do’s and Don’ts


Take notes. Take notes every time you speak with someone or have a negotiation session, and add the date of the call. You’re very likely to speak with different people in the same company, and you could get conflicting information. You may also speak to someone who is not authorized to make a particular agreement. Always note who you spoke to and when, as well as what was discussed in the negotiation, including any settlement amounts.

Understand the difference between secured and unsecured debt. Some unsecured creditors, like credit card companies, may try to convince you that they’re actually secured creditors and will threaten to repossess merchandise. Examples of unsecured debt include credit card debt or medical bills. If you understand the difference between secured and unsecured debt, they can't fool you. 

Unsecured creditors generally have far less negotiating power than secured creditors. Unsecured creditors can repossess property only under very rare circumstances. And, they usually stand to lose much more than secured creditors if they can’t reach a settlement with you. This is because if a settlement can’t be reached and you file for Chapter 7 bankruptcy, the unsecured creditor usually won’t receive any money at all.

Understand how the law can benefit you, and not the creditor. Both secured and unsecured creditors have to abide by the law. If they’re third-party debt collectors, they’re likely subject to collections laws that protect debtors. The largest of these collection laws is the Fair Debt Collection Practices Act (FDCPA), which is enforced by the Federal Trade Commission (FTC). This law limits what debt collectors can legally do to collect a debt from you.

If you’re negotiating with a debt collection agency, remember that they must abide by the FDCPA. Although original creditors aren't subject to the FDCPA, many states have laws that oversee creditor collection tactics as well.

Remember that creditors usually view suing a debtor as a last resort. Creditors generally use lawsuits as a last resort, even though they may threaten it immediately. This is because lawsuits cost a lot and take a lot of time. Also, a lawsuit won’t guarantee the creditor that they'll actually receive any money.


Don't use the “wrong” money to settle your debts. In debt negotiation, creditors will be much more receptive if you agree to pay them in cash. If you can pay immediately, a creditor is more likely to agree to a settlement and to settle for a lower amount. Which money you decide to use will depend on your particular situation. Generally, there are two sources of money that you should avoid using to pay off debt.

First, it’s usually not a good idea to use the equity in a secured property to pay your unsecured debt. This typically involves getting a home equity loan or car title loan to pay off unsecured debt. If you can’t make payments on these new loans, you risk losing your house or car. Second, it’s generally not advised to use retirement funds to pay unsecured debt. There could be tax implications for withdrawing the funds, or you may have to repay the funds if you take them out as a loan. 

Don't overpay. Many unsecured creditors may eventually settle for much less than your original amount owed. When beginning negotiations, start low and shoot for 50% — or less, if possible — as the final settlement amount.

Don't make promises you can’t keep. Failing to consider whether you can realistically pay off the debts or make the negotiated minimum payments can lead to a worse financial situation down the road. For example, if you have $10,000 in total debt and negotiate to settle it at 50%, will you be able to pay the $5,000? Debtors often end up still filing for bankruptcy even after paying thousands to settle some of their debts.

Let’s Summarize…

Although debt negotiation can be difficult, there is nothing a debt settlement company can do for you that you can’t do yourself for free. Also, debt settlement company fees can be high, and there is no guarantee that they will be able to settle your debts. If you do decide to hire a debt settlement company, take time to research their reputation, as many have a history of taking advantage of debtors.

If you’re comfortable and confident in your negotiating skills and you can follow through with making any settlement payments that are agreed upon, debt negotiation can be a good way to save a significant amount of money. Unfortunately, you probably won’t be able to avoid a lower credit score, but after the settlement, you can begin to rebuild it.

If you think you might need extra help, consider credit counseling. A credit counselor can help you create a repayment plan. And since they usually work for nonprofits, they’re not incentivized to make money off you. If you think bankruptcy might be the right choice for you, contact us. We can help.

Written By:

Natasha Wiebusch, J.D.


Natasha started her career as a lawyer representing labor unions and other investors in multi-state class action lawsuits. Passionate about the civil rights elements of her cases, she moved into practicing employment law to represent employees against discrimination of various ki... read more about Natasha Wiebusch, J.D.

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