Should You Settle Debt On Your Own or Hire Professional Services?
Debt settlement might be the best path forward if you find yourself drowning under a mountain of high balances and late payments. But the process isn’t easy: it’s time consuming, has a noticeable impact on your credit and comes with no guarantee of success. So should you negotiate with creditors yourself or hire a debt relief company to do it for you?
Read on to explore whether a do-it-yourself (DIY) or managed approach would work best for you and learn more about debt settlement.
Why Settle Debt on Your Own?
Although settling debt on your own may seem daunting, especially if you aren’t used to speaking with creditors, doing so puts you in complete control of the process. For starters, you’ll get to negotiate on your own terms, choosing what accounts to try for first and the starting offers you’ll make.
Settling debt on your own also saves you money on fees, since debt settlement companies generally charge 15–25% of the debt you enroll as fees for their services. The DIY approach, on the other hand, costs little to nothing out of pocket—but it can be time-consuming, and as the saying goes, time is money.
How to Negotiate a Debt Settlement
If you decide to handle debt settlement yourself, you should prepare yourself before making any calls.
Start by documenting the financial hardships that are holding you back from paying the full amount of your debt, such as medical issues, job loss, divorce or other significant life events. Then, research settlement rates and determine how much you can realistically offer — you typically need access to at least 30-50% of each debt in cash.
Once that’s done, proceed as follows for each creditor:
- Call and ask for the “debt settlement” or “hardship” department.
- Start negotiations with a low offer, say, around 30% of what you owe. Doing so leaves room to negotiate upward if necessary.
- Get everything in writing and never send a payment without a formal settlement agreement that confirms the amount will satisfy the debt in full (or in a set time frame, in the case of payment plans).
- Maintain detailed records of all communications with the creditor, including the names of any employees that handled your case, the dates of your calls and payments, and the details of your conversations.
When to Consider DIY Debt Settlement
Settling debt yourself works best when you can focus your efforts on a limited number of accounts and can withstand the emotional stress of negotiations. You’ll need to dedicate sufficient time to the process, doing research, making calls, and following up with creditors.
For example, if your debt consists of three to five accounts and is under $15,000, DIY settlement might be worth considering.
Another factor to consider is who your debts are with. Settlements often go more smoothly when your debts are with their original creditors rather than collection agencies. The former sometimes offer better terms, making them easier to negotiate with personally.
However, the most important factor to consider for DIY settlement is your ability to negotiate. If you can discuss terms and remain calm and persistent despite rejection or aggressive collection tactics, you’ll be much more likely to reduce your debt successfully.
When Professional Debt Settlement May Be a Better Choice
Despite the fees associated with professional debt settlement, you might find this option a more reasonable approach than settling debt on your own. Struggling with debt can be tough enough; having to rigorously document all your interactions with several creditors as well is simply too much for some.
Professional debt settlement companies negotiate with creditors on your behalf, often leveraging their industry relationships and volume of clients to secure settlements. This can be especially valuable if your debt is substantial, your number of creditors is too large to handle by yourself, or you lack confidence in your negotiation abilities.
Another reason you might opt for professional debt settlement is if previous DIY attempts have been unsuccessful. Additionally, the expertise and experience offered by these companies can help if you need guidance navigating complex settlement issues, such as if your debt has been charged off or sent to collections.
How to Choose the Right Debt Settlement Company
Careful vetting of debt settlement companies is essential in order to avoid falling into debt relief scams.
Legitimate companies only charge fees after successfully settling a debt — never upfront. They also acknowledge that results vary from one client to another and will offer advice on the potential tax consequences of settlements.
Fee percentages should be based on the amount of debt enrolled or the amount saved, not a combination of both. Moreover, be wary of guarantees to settle all debts for specific percentages or within certain timeframes.
Here are several tips that should help you find a trustworthy debt settlement company:
- Verify their credentials and membership by looking for companies accredited by the American Fair Credit Council (AFCC) or International Association of Professional Debt Arbitrators (IAPDA).
- Check consumer reviews and complaints by researching the company on the Better Business Bureau, Consumer Financial Protection Bureau, and your state’s attorney general office.
- Call and ask about their negotiation process to understand their approach and how they’ll communicate with you throughout the process.
- Review their service agreement thoroughly to understand exactly what services will be provided, any timeframe expectations, and the potential costs.
- Inquire about customer service to determine who your point of contact will be and how accessible they are for questions.
While debt settlement companies can negotiate on your behalf, they cannot stop lawsuits, guarantee specific results, or immediately stop collection calls.
Understanding Debt Settlement
Debt settlement involves stopping payments to creditors and saving money in a dedicated account. The negotiation process begins once you have sufficient funds. Then, after paying the negotiated amount, you receive written confirmation that the debt is considered satisfied.
Settlement isn’t a debt payoff strategy you should opt for without serious consideration. In fact, many financial experts recommend exploring other options first like credit counseling, debt management plans, or even bankruptcy, depending on your financial situation. There are several reasons for this, namely the impact to your credit and the potential tax consequences.
That’s not to say you should never consider debt settlement either — just that it should be a last resort tactic. Settlement is not a quick fix and has serious repercussions, but it can nonetheless be a helpful solution, especially for large balances of unsecured debt, such as credit cards, medical bills, and personal loans.