Carrying debt has become a lot more expensive than it was just a few years ago — and thats due, in major part, to the current rate environment. Right now, the average credit card interest rate is sitting close to record highs of nearly 22%, and if your credit profile is less than ideal, you could be facing much higher rates. Personal loan rates are also well into the double digits, and other types of borrowing costs are high overall, too. So, for anyone relying on credit to cover expenses or emergencies, todays rate landscape has made it much more expensive to carry a balance.
But unfortunately, as borrowing costs have climbed upward, so have the financial struggles borrowers are facing. Recently, there has been an uptick in payment defaults and severely delinquent accounts, especially when it comes to credit card debt. The number of cardholders who are making just the minimum required payments on their accounts is also climbing, indicating that its getting harder for people to cover both the necessities and their debt payments.
If youre in this situation, its critical to act soon. And, one option you have is debt forgiveness, also known as debt settlement, which is a strategy where you negotiate with your creditors to pay less than the total balance you owe in return for a lump-sum payment. But before you jump into this process, its important to understand the right percentage to offer if you want to maximize your chances of reaching an agreement.
Debt settlement also known as debt negotiation or debt forgiveness, can provide much-needed relief if you are struggling with high levels of unsecured debt like credit cards or personal loans. With debt settlement you work with your creditors or a debt relief company to pay a lump sum that is less than the total amount you owe in exchange for forgiven debt. But how do you know what constitutes a fair offer when trying to settle? Here is a comprehensive guide to debt settlement and determining fair settlement percentages.
How Debt Settlement Works
With debt settlement, creditors agree to accept a partial payment on what you owe in order to close out the account For example, if you owe $10,000 on a credit card, the creditor may accept a $4,000 lump sum payment to consider the debt settled. The remaining $6,000 is forgiven Debt settlement can apply to credit cards, medical bills, personal loans, and other unsecured debts.
Settlement offers are generally lump sum payments, so you’ll need to have the funds readily available when negotiating. Many people work with debt relief companies who can pool regular contributions into an escrow account and then disburse the lump sum once a settlement is reached. There are fees involved for this service.
Debt settlement can provide relief, but there are some downsides:
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It can negatively impact your credit score for up to 7 years. This can make it harder to get approved for financing.
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Creditors are not obligated to accept settlements. They will usually negotiate only if the account is delinquent.
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Any amount forgiven over $600 may be taxable income.
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Settled accounts are typically closed, so you lose the available credit.
What is a Fair Percentage for Debt Settlement?
There is no single rule for what percentage constitutes a fair settlement offer. Creditors decide on a case-by-case basis depending on factors like:
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How long the debt has been delinquent – The longer you’ve been behind on payments, the more willing creditors may be to settle for a lower percentage.
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Your current financial situation – If you can demonstrate true hardship, creditors may accept less.
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The creditor’s internal policies – Each creditor approaches settlements differently.
That said, research shows that most successful debt settlements fall in the range of 30% to 50% of the original balance.
For example, if you owe $20,000 on a credit card bill, a fair settlement offer might be in the range of $6,000 to $10,000. Creditors know that something is better than potentially losing the entire balance if you end up in bankruptcy.
It’s unlikely a creditor will accept a very low settlement percentage if you’ve been making payments on time. The older the debt and the less likely you are to pay, the more leverage you have to offer a lower payoff amount.
Tips for Making a Fair Settlement Offer
When making a debt settlement offer, keep these tips in mind:
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Start low but be realistic. A good opening offer might be 25% of the balance. But know the creditor will likely counter higher.
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Consider a lump sum payment. Creditors typically expect settlement offers to be paid quickly in a single lump sum. Make sure you have the funds.
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Review creditor policies. Some creditors publish general settlement guidelines. This can give you insight into acceptable ranges.
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Document financial hardship. Provide evidence of job loss, medical bills, etc. if relevant. Creditors may offer better terms if you can prove legitimate struggles.
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Use a debt relief company. Professional negotiators understand credible settlement ranges and have experience striking deals. The fees may be worthwhile.
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Get any agreement in writing. Verbal promises won’t prevent the creditor from sending the debt to collections. Lock in settlements in a written contract.
Key Factors in Determining a Fair Debt Settlement
As you develop your own settlement offer, keep these key factors in mind:
How Long the Debt Has Been Delinquent
Creditors have more incentive to settle if you are many months behind on payments already. One study showed creditors accepted average settlement offers of:
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42% for debts 6-12 months delinquent
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35% for debts 12-24 months delinquent
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32% for debts 2+ years delinquent
The longer you’ve been unable to pay, the more willing the creditor may be to take a partial payment via settlement.
Your Current Financial Situation
To secure the best possible terms, be prepared to provide evidence of financial hardship like job loss, high medical bills, divorce, etc. Creditors are more likely to offer debt forgiveness if they believe you truly can’t repay the full amount.
Type of Debt
Different rules and regulations apply to certain debt types. For example, federal student loan settlements are very limited, while tax debt relief options are broader under the IRS Fresh Start program. Know the particular nuances of the debt you want to settle.
Credit Utilization
High balances relative to your credit limits can incentivize creditors to reach a settlement so you can start repayment. If you owe $15,000 on a card with a $20,000 limit, your high 75% credit utilization may motivate the creditor to compromise.
Alternatives to Debt Settlement
Debt settlement is one option for addressing unaffordable debt payments, but there are other paths to explore:
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Credit counseling – Nonprofit agencies can help you manage payments through a Debt Management Plan (DMP).
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Debt consolidation loans – Take out a new loan at a lower rate to pay off and combine multiple debts.
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Balance transfer cards – Transfer balances to a new card with a 0% intro APR to save on interest.
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Bankruptcy – Court-supervised process to eliminate eligible debt under Chapter 7 or Chapter 13.
Each option has pros and cons to weigh based on your specific financial circumstances. It’s smart to consider all the alternatives when developing a household debt relief plan.
The Bottom Line
Debt settlement can be a viable option for addressing unsecured debts you’ve become unable to repay. While there is no single rule for fair settlement percentages, offers in the range of 30% to 50% of the original balance have the highest probability of creditor acceptance based on account delinquency, financial hardship, and other factors. With a strategic approach and realistic expectations, debt settlement may provide the fresh start your finances need.
Should I try to settle debts on my own?
Technically, you can try to negotiate a debt settlement on your own, but whether or not you should is a different question. For some people, the DIY settlement process goes smoothly. They simply call their creditors directly, explain their financial situation and make an offer. This can work if youre a strong negotiator and youre very clear and organized about what you can pay. However, many people find the process intimidating, and mistakes are easy to make if youre not experienced in debt negotiations.
Thats where working with a debt relief expert can offer big advantages. Debt relief companies employ professional negotiators who understand how to work with creditors, what kinds of settlement percentages are reasonable and how to structure deals that result in a positive outcome. Plus, they often have existing relationships with major credit card companies, which can lead to securing better settlement terms than you might get on your own.
When you work with a debt relief company, they can also help you navigate the paperwork, make sure the settlement agreement is properly documented and ensure that the creditor reports the debt as “settled” or “paid as agreed” to the credit bureaus. This can help you avoid unpleasant surprises later, like a creditor coming back for more money or the settlement hurting your credit even further.
Keep in mind, though, that debt relief companies charge fees for their services, so youll need to weigh the potential cost savings against the added expense.
If youre struggling under the weight of high-rate debt, settlement can be a valuable tool for getting back on your feet, but its not something to rush into blindly. Most successful debt settlements will lower your debt by 30% to 50%, but how much you can offer depends on factors like your unique financial situation, the creditors policies and how far behind you are on payments.
And, while its possible to handle settlement negotiations on your own, many people benefit from working with a debt relief professional who can guide them through the process, negotiate better terms and ensure the settlement is legally airtight. In many cases, those benefits more than outweigh the costs that come with working with a debt relief expert, but before making a decision, youll need to weigh all the factors to determine whether thats true in your case.
Angelica Leicht is the senior editor for the Managing Your Money section for CBSNews.com, where she writes and edits articles on a range of personal finance topics. Angelica previously held editing roles at The Simple Dollar, Interest, HousingWire and other financial publications.
What percentage should I offer to settle my debt?
Theres no specific percentage that guarantees a successful debt settlement. Creditors are, after all, under no obligation to settle and forgive any part of your balance. That said, most successful settlements typically result in paying 30% to 50% less than the original balance. So, for example, if you owe $10,000 on a credit card, you might reasonably offer $5,000 to $7,000 as a lump-sum settlement.
Why this range? Creditors know that if youre facing financial hardship and they dont recover something from you, they could end up getting nothing at all, especially if you declare bankruptcy. So, many creditors are willing to accept a reduced amount to close out the account, particularly if youre already delinquent or the debt is in collections.
Keep in mind, though, that creditors usually wont accept a low offer if youre still current on your payments or only slightly behind. They are more likely to negotiate if your account is already several months past due and they believe youre experiencing real financial hardship. So, in general, the older the debt and the higher the likelihood of nonpayment, the more leverage you may have to offer a lower percentage.
Its also important to know that creditors often expect the settlement payment to be made in a lump sum. Offering a lowball percentage without the ability to pay quickly can hurt your chances. So, before making any offer, assess how much cash you realistically have available and be prepared to follow through right away if your offer is accepted.
What is a Fair Settlement on a Credit Card Balance?
FAQ
What is a reasonable settlement offer for debt?
That said, most successful settlements typically result in paying 30% to 50% less than the original balance. So, for example, if you owe $10,000 on a credit card, you might reasonably offer $5,000 to $7,000 as a lump-sum settlement.
Should I accept a credit card settlement offer?
The benefits of credit card settlement are clear: You may be able to get out of debt more quickly without the responsibility of the full debt load. However, your credit score will likely drop as a result of debt settlement, and you may have tax consequences down the line.
What percentage of my debt should I offer to settle?
- Start Low : Begin with an offer of around 30-40% of the total debt.
- Negotiate Up : Be prepared to increase your offer if they counter. Aim to settle for 50-70% of the total debt if possible.
Is debt settlement a good idea?
But debt settlement isn’t usually a good idea, because it can seriously damage your credit score, and there’s no guarantee of success. Learn more about how debt settlement works, if it ever makes sense to hire a debt settlement company and alternatives for getting out of debt.