How to Negotiate Directly with a Bank to Settle Debt

Written by duncan jenkins
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How to Negotiate Directly with a Bank to Settle Debt
Debt settlement can save you money--but it will cost you your credit. (money image by Bradlee Mauer from

Debt settlement is the process by which you agree to pay a lower amount on a credit account. Sometimes debt settlement is handled using a professional debt settlement agency, but it is possible to accomplish a debt settlement on your own. You will need to come up with a good reason and support your argument with documentation. In addition, it's important to consider the consequences of debt settlement.

Skill level:
Moderately Challenging

Things you need

  • Account statement
  • Bank statements (12 months)
  • Other documents (doctor bills, social security payments, disability note)

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  1. 1

    Pull a copy of your credit report. Visit the site This site gives consumers free copies of credit reports. Find the delinquent debt on your report. Determine the total amount outstanding and, if necessary, find out the company holding the debt (if it's not your original creditor).

  2. 2

    Calculate your debt-to-income ratio (DIR). Most lenders will not consider a settlement if you are capable of repaying the loan as it stands. To find your DIR, divide all of your monthly bill payments by your total monthly gross income. You will likely not qualify for a settlement if your DIR is below 50 per cent.

  3. 3

    Decide why you need a settlement. This is usually caused by a financial hardship, like a disability or loss of employment. Make sure you pull out and photocopy all documents related to cause of your hardship.

  4. 4

    Write an initial letter to the company holding your debt. Provide your name, address, social security number, date of birth and account number. Indicate your willingness to honour part of the debt. Ask about settlement and hardship options. It's important to not call with this information--a letter (either in an e-mail or on paper) will create a paper trail.

  5. 5

    Respond to the company's response. Some companies will not offer a settlement without a good-faith lump sum payment. Write back and suggest a figure to meet this initial good-faith payment.

  6. 6

    Counter any offer given to you by your creditor. Be fair when making a counter offer. You are not in the best bargaining position. Most creditors will not settle for less than 50 per cent of the debt owed. You may get a lower settlement if you offer to pay the entire balance in one payment.

  7. 7

    Hammer out the details of the settlement offer once you agree on a number. You may wish to pay over time or with a lump sum. Get the final agreement sent to you in writing. Review the document with a trusted adviser, like an attorney or accountant.

  8. 8

    Sign the document and photocopy it for your records. Send in the document to the lender. Make the payments as agreed.

Tips and warnings

  • Debt settlement will damage your credit. Once the debt is paid, it will report as Paid, Settled. This indicates to all future lenders that you did not fulfil your credit agreement.

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