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How to settle your debt without a third-party agency

When it comes to negotiating how much you owe, you might be the best person for the job.

Debt negotiation is one option available to help set you back on the road to financial health, but it’s not the right move for everyone. Whether you choose to work with a debt settlement service or try your hand at negotiating directly with your creditors, you’ll need to invest money, time and energy for success.

6 steps to negotiating your debt on your own

  1. Reach out to your creditors.

    You don’t need to include a drawn-out tale of how you got to your predicament. Simply explain that you can’t pay your full debt. If you aren’t happy with their response, continue asking for a supervisor until you speak with somebody who’s receptive to negotiating

    How does debt negotiation affect my available credit?

    Once you tell a creditor that you can no longer pay, it will likely freeze the credit line you have with it, quickly restricting your access to credit. Factor this limited available credit into your budget so that you aren’t caught short in an emergency.

  2. Propose a payment you can afford.

    If you can afford to pay $500 of your $750 loan today, offer it up. You may be turned down, but you’ll never know whether it’s an option if you don’t ask. It might even offer up a negotiating starting point.

    How to request a lower interest rate

    Ask for a lower rate with your current lender. You can sometimes get a lower rate if your credit score has improved and you’ve made your payments on time.

    To request a lower rate, call your lender. Move up the chain of command until you’re speaking to someone who can actually give you a lower interest rate — this might even be the president. Keep asking to speak to a supervisor until you reach the appropriate person.

    Make an argument for yourself: Be sure to point out how much business they would lose if you were to consolidate your loan with another institution. If your call is a success, your lender will review your credit and payment history to come up with another interest rate.

  3. Ask about a debt settlement plan.

    See if your creditor is willing to put together a payment plan for your debt that you can chip away at over time. You might even find they’re willing to report your on-time payments to the major credit bureaus, paving the way to financial health more quickly.

  4. Agree to realistic terms only

    Resist agreeing to any first offer, especially if it’s not financially sound. If making the payments will stretch you beyond budget, you could find yourself right back at square one with more serious damage resulting from a debt default.

    Find out how much you could afford to pay

  5. Get any agreement in writing before you pay

    Documentation is essential to any financial decision, but especially when negotiating your debts. To protect your credit score, ask the creditor to write into your agreement that they won’t report you to the credit rating bureaus unless you default.

  6. If you can’t come to an agreement, consider default
    Defaulting on your debt doesn’t mean you’re no longer responsible for what you owe. Rather, it likely means your original creditor will forward or sell your debt to a collection agency. In the meantime, you can budget to save as much as you can for a large payment on your debt when the agency starts calling.

Should I negotiate my own debt with creditors?

First, dive deep into your budget to see how much money you bring in, how much you pay out and what you can realistically afford. Knowing this information, you can more confidently negotiate your debts to periodical payments or a plan that works best for you.

But negotiations take more than a solid budget: Creditors are trained to get as much as they think they can get out of you. Pleading your case takes time and persistence. Remaining calm, firm and resolute is key.

It might go against your gut to answer a call from a creditor. But keep in mind what all creditors want: Your money.

In many cases, your creditor is merely looking for an alternative to writing off your debt as a loss. Especially collectors, who are known for buying debts from creditors at a discount.

Can I negotiate all debts?

In general, yes. But secured loans may be harder to renegotiate if your creditor believes it can simply sell your security asset to cover what you owe.

Must read: Can I negotiate government debts?

Yes. If you owe debts to the government — for instance, state or federal taxes or student loans — you might still be in a position to negotiate, even with the IRS.

If you can’t pay your taxes, you can apply for a payment agreement or an offer in compromise (OIC). If you think you can pay your debt in full in the future, you can also apply for an extension or “currently not collectible” status.

When to negotiate debt

When you’re unable to pay off your creditors, DIY debt negotiation can dig you out from under what you owe and give you a chance to rebuild your finances. Still, it’s a risky option that can appear on your credit report for years. Whether or not it’s right for you depends on your financial situation.

Consider negotiating if:

  • The bulk of your debt is with companies that don’t report to the three major credit bureaus. For instance, many small-dollar short-term loan lenders don’t report to Experian, Equifax or TransUnion.
  • You’ve recently lost your job or main source of income.
  • You can’t find approval for a balance transfer credit card with more favorable rates.
  • You’ve suffered an expensive unexpected expense that you can’t pay off.

Look for another option if:

  • You’re planning to buy a house, a car or another major asset in the next seven years.
  • You’re recently married and your partner has bad credit. To avoid further hurting your credit scores, a personal loan allowing a cosigner could be a better option.
  • You’re able to extra income, rework your budget or find another way to pay down your debt.

What else should I know about settling my debt?

The range at which creditors are willing to settle debts for varies from 30% to 70% of the amount you owe — that upper end offering motivation to stand firm in your negotiations. Also, remind yourself that every decision involving your debt can follow you around for the next seven years or more.

When you’ve finally agreed on an amount to pay, avoid giving your creditor or collection agency direct access to your bank account. Offer to pay by check, money transfer, wire, PayPal or a similar option.

Before you sign any agreement, consider asking a lawyer to look over it. If you can’t afford legal services, contact the Legal Aid Society for cheap or free assistance.

Do I have any protections when it comes to debt collection?

Yes. The Federal Trade Commission requires debt collectors to follow specific rules:

  • A debt collector can’t call you before 8 a.m. or after 9 p.m. in your time zone.
  • If you tell a collector that you can’t take calls at work, they can’t call you there again.
  • If you tell a collector to stop calling you, they are legally obligated to stop, except to tell you that they’ve stopped or to notify you of a lawsuit to collect your debts.

The FTC also prohibits debt collectors from using harassment, abuse or lies to collect on your debts. This includes cursing, yelling or repeatedly calling to annoy you.

Report any problems with your debt collector to your state’s attorney general office, the Federal Trade Commission or the Consumer Financial Protection Bureau.

Bottom line

After you’ve agreed to a DIY debt settlement plan with your creditors, stay on top of your payments throughout the duration of your agreement. Tying up a solid budget before negotiating means you’re in an ideal position to make good on your renegotiated debt. If negotiating with your creditors doesn’t work, consider other debt relief options to help keep you out of bankruptcy.

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