It can be tough to determine the right amount to offer when you're in the process of settling debt for less than what's owed.
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Carrying debt has become a lot more expensive than it was just a few years ago — and that's 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, today's 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 it's getting harder for people to cover both the necessities and their debt payments.
If you're in this situation, it's 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, it's important to understand the right percentage to offer if you want to maximize your chances of reaching an agreement.
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What percentage should I offer to settle my debt?There's 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 you're facing financial hardship and they don't 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 you're already delinquent or the debt is in collections.
Keep in mind, though, that creditors usually won't accept a low offer if you're 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 you're 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.
It's 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.
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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 you're a strong negotiator and you're very clear and organized about what you can pay. However, many people find the process intimidating, and mistakes are easy to make if you're not experienced in debt negotiations.
That's 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 you'll need to weigh the potential cost savings against the added expense.
The bottom lineIf you're struggling under the weight of high-rate debt, settlement can be a valuable tool for getting back on your feet, but it's 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 creditor's policies and how far behind you are on payments.
And, while it's 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, you'll need to weigh all the factors to determine whether that's true in your case.
Angelica Leicht