This article is for informational purposes only and should not be construed as financial advice.
As a previous CEO of a debt settlement company, I have settled a lot of debt in my life and have a good understanding of what percentages to offer to settle the debt. So, I understand how to settle debt, who sues, and what are the pros and cons of doing it yourself vs hiring a firm.
We wrote an entire article covering how to settle the debt for less on your own, but it can be helpful to do a comparison on whether to hire a firm or do it on your own.
Why?
There are many pros and cons to settling debt on your own as opposed to working with a debt settlement company. One main pro of settling debt on your own is saving money on fees. Debt settlement companies typically charge anywhere between 15%-25% in fees, so depending on how much debt you have, these fees can add up rather quickly. That said, there are pros to working with a debt settlement company, so we built a DIY debt settlement calculator for you to compare the costs and pros and cons of working without a debt settlement firm.
1. Understand Where in the Process
It is good to gather all of your financial information and examine where you are at in the process with each separate debt. Is there a lawsuit? Is there potential for one? You can use our free Lawsuit Likelihood calculator to see if there is potential for a lawsuit in the future. This may help you determine which debts to handle first.
Pre-Lawsuit
If you are not currently facing a debt collection lawsuit, creditors may be more willing to settle for a lower amount than if you are sued.
For example, creditor 1 may take 50% of the amount owed if the account is 180 days behind, but let’s say that creditor goes and hires a law firm to sue you in a debt collection lawsuit. In that case, the collection agency may have more expenses, so it would like to recoup fees, so it may now settle for only 75% vs. 50% before because it wants to still make a profit and pay out the law firm.
Post-Lawsuit
A debt collection lawsuit may be a bit different than a normal debt collector calling you. It will depend on case by case if you should call the original creditor or the law firm suing you. If calling the original creditor, you can attempt to directly settle with them and they can help negotiate everything and get it in writing for you.
There are two things to note when dealing with a debt collection lawsuit, the first being you will probably sign a stipulated judgment, This essentially will claim that if you do not continue to make the payments on the terms of the settlement, then you may have a default judgment against you. So make sure you are prepared and able to make the payments agreed upon in the settlement. The second thing to note is that the percentage settled may be higher due to the lawsuit. In their perspective, it may be that the account would go to a judgment which then could be garnished and they would receive 100% of the balance, so they may believe they have the upper hand.
2. Who’s the Creditor?
It is important to do research and see which companies may be more likely to settle than others. It doesn’t mean you shouldn’t try, but it may be best to go in with expectations. The percentage the creditors will agree to may vary as well.
Some Creditors will Settle for More than Others
It may be best to start small anticipating that the creditor will present you with a counteroffer, and you will want enough wiggle room to be able to manage it.
An example of a starting percentage may be 25%, expecting that it may go up to as much as 50% of the original debt. If you are unable to come to an agreement with the creditors, asking about a payment plan may be the next step.
Credit Unions and Federal Credit Unions may not Settle for Less
Another thing to note is that credit unions may not give a discount, but it would be helpful to ask just in case.
For example, if you only have social security or disability income and can clearly show that you do not make anything additional each month then you may have a case for debt forgiveness and a lower monthly payment.
3. How Far Behind is the Debt?
Contracts, promissory notes, and revolving credit accounts are based on due dates for payments. Payments could include periodic payments (i.e., monthly, weekly, quarterly, etc.) or a lump sum payment. The payment due date is significant because it triggers the “default” date.” The default date triggers the beginning of the statute of limitations.
A ”default date” is the first date you miss a scheduled payment. For example, if your credit card payment is due on the 15th of the month, you are in “default” on the 16th day of the month. Default means that you failed to make a scheduled payment according to the agreed-upon terms. It is a common misconception that a person is not in default until after a grace period. A grace period is the number of days you have before a late fee is added to the payment. Grace periods vary, depending on the terms in the written agreement.
Debt that is Further Behind may get a Better Deal
If your debt is a few years old, it may be easier to get a better deal on it, as opposed to newer debt.
Debt Past Statute of Limitations may get a Great Deal
When speaking with each creditor, it is good to know that each scenario will be different.
Older debts MAY be easier to settle, due to the fact that if you have not made a payment on a debt in a couple of years, it may have passed the statute of limitations for your state.
4. Structured Settlement vs Lump Sum
A structured settlement is one that has a specific duration of time greater than one payment. For example, you could have one for 12 months so that is breaks up the amount of the payments into a more manageable amount. Essentially, you would not need the entire payment upfront, but rather can pay it over a certain duration of time.
A lump sum settlement is having a settlement in one payment. A benefit to this would be that you may be able to get a better deal. For example, they would rather get $5,000 upfront opposed to monthly payments that may not be guaranteed over time.
Also, it can be important to get both the debt settlement offer letter and the paid-in-full letter in writing.
5. Your Financial Hardship
Certain scenarios may aid you in receiving a better deal from your creditors when they fully understand your financial hardship. For example, if you have SSN income only, you may get a better deal than someone with assets and a higher income.
However this is not a guarantee, but it is a possibility. It could be a good idea to write out just exactly how your financial hardship happened and then why you cannot pay the debt in full.
Summing it up
You may still be curious if you should or should not settle debt on your own or what percentage you should ask for. Although the answer will vary depending on each situation, we built a DIY Debt Settlement calculator below to help go through questions that can help you understand the pros and cons of hiring a company vs settling debt on your own to help you make the most informed decision.
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