How Much Can You Usually Settle a Debt For?
- Creditors are known to settle for anywhere from 10% to 90% of what you owe.
- Factors like the age and type of debt play a role in how much you can settle for.
- Alternatives to debt settlement include loan consolidation, debt management programs, and bankruptcy.
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A debt collector’s job is to collect money, and your job is to protect yourself and your household. While it may sound odd, there’s no reason you can’t work together. Through negotiation, you may be able to save money, while the debt collector may successfully collect a portion of what’s owed.
If you’re wondering how much debt forgiveness is available, the answer is that it depends. We'll walk you through debt settlement averages and let you know what you might expect.
How Much Can You Usually Settle a Debt For?
Creditors have been known to accept anywhere from 10% to 90% of the balance to satisfy a debt. The settlement amount hinges on the age and type of debt, and how much of a chance the creditor thinks they have to collect the full amount. Most negotiations probably land somewhere closer to half. That means a creditor might accept somewhere between $4,000 and $6,000 to settle a $10,000 debt.
There's no one-size-fits-all answer regarding debt settlement amounts because there's no industry standard. Each negotiation depends on the factors at play in your situation.
Factors That Affect How Much You Can Settle For
If you're one of the roughly 77 million Americans with debt in collections, every dollar counts. Once you understand how debt collectors categorize different types of debt, it’s easier to develop a strategy for negotiations.
Type of debt
Debt settlement is a strategy you can use to deal with unsecured debt. With unsecured debt (like credit cards and most personal loans), the creditor’s only recourse may be to sue you. The lawsuit process costs money and time, and there’s no guarantee they’ll win.
Even if they win, there’s no guarantee they can collect. For example, if your only source of income is Social Security, creditors can’t take it, even with a court order. The creditor knows that in some cases, negotiating is more cost-effective.
Secured debt (such as a mortgage or auto loan) generally can’t be settled. Secured debts are guaranteed by collateral. The home is the collateral for a mortgage, and the car is the collateral for a car loan. If you default on a secured loan, the creditor can take your collateral and sell it to recover the money you owe.
Age of the debt
The statute of limitations is the amount of time creditors have to sue you to recover debt. For most debts, there’s a time limit for creditors to sue you, although there are exceptions. For example, there's no statute of limitations on federal student loans.
Most statutes of limitations last between three and six years, depending on where you live and the type of debt.Once the statute of limitations expires, a creditor loses the legal right to sue you for it. The closer you get to the statute of limitations expiring, the more leverage you have in negotiations.
Creditor policies
Debt collection agencies have different policies regarding debt settlement, and debt collectors can only agree to settlements that fit company guidelines.
While one debt collector may be supremely understanding, another may hold the line, refusing to budge. Creditors are under no obligation to negotiate, although most would rather collect something than nothing at all.
Your financial situation
Creditors might be more flexible if you can show financial hardship. For example, if you've recently lost your job, been hospitalized, or faced another economic challenge, you might be able to successfully resolve a debt for a smaller amount.
How to Negotiate a Debt Settlement
Anyone can negotiate their own debt. Negotiating can be stressful. You may have to make multiple calls to your creditors, and they’re likely to play hardball, at least to start. If you’re uncomfortable or overwhelmed, you could also settle debts with the help of a debt settlement company. Either way, the process is similar:
Get organized. Your first step is to gather information about your debt, including how much you owe, the interest rate, and repayment terms. If the debt collector has sent you information about the debt, review it to ensure it's correct.
Develop a realistic budget. Make a note of your monthly income. From there, subtract your fixed expenses, including rent, utilities, transportation, groceries, and so on. When you're finished, decide how much money you have left over each month to make payments against your debts.
Contact creditors or debt collectors. If you're handling negotiations yourself, contact the debt collector that has approached you for payment. Be honest about your situation. Let them know why you find it impossible to meet the original agreement terms.
Negotiate the amount. There's no single way to negotiate. For example, if you owe $5,000 on a credit card bill and can afford a one-time payment of $1,000 to settle the debt, make that offer.
Get everything in writing. As lovely as the person on the other end of the phone may be, get everything in writing, and never send money without a written agreement. Having it all in writing is the best way to avoid misunderstandings.
Follow through. Once you've struck an agreement, stick with your end of the bargain. As long as you honor your agreement, the creditor or collection agency should honor theirs.
Pros and Cons of Settling Debt For Less
Like most things in life, debt settlement has pros and cons. Pros of settling debt include:
Put debts behind you
Reduce the amount of debt you have to repay
Lower stress
Faster path to becoming debt-free
Cons of settling debt for less include:
Negative impact on your credit report, as collectors could report "settled" to the credit reporting agencies. This is better than a collection account, but not as favorable as “paid as agreed.”
If you use a debt settlement company, the fees reduce your savings.
There are no guarantees that a creditor or debt collector will negotiate. You could still be sued for the debt.
Forgiven debt may be considered taxable income, leaving you with a larger tax bill for the year. If you're insolvent when you settle, meaning your total debt is more than the total value of what you own, you don’t owe income taxes on the forgiven debt. Consult a tax professional before you settle debts.
What If I Can't Settle My Debts? Alternatives to Debt Settlement
Debt settlement can work beautifully, but it’s not your only option. Here are a few others:
Debt consolidation loan
Debt consolidation means using a new loan to pay off multiple existing debts. Consolidating could lower the cost of your debt and reduce the number of monthly payments you have to make. It’s a strategy to consider if you qualify for a loan with a lower interest rate than what you’re paying now.
Debt consolidation generally isn’t an option if you’re already experiencing financial hardship. You have to qualify for the loan and afford ongoing payments.
Hardship program
Some creditors offer hardship programs. You might be able to pause payments or get a lower interest rate.
Home equity loan
If you own a home and you’ve built up some home equity, you could apply for a home equity loan or HELOC (home equity line of credit). Home equity is the difference between how much your home is worth and how much you still owe on the mortgage.
Home equity loans are secured loans. Your home is the collateral for the loan. If you default on the loan, you could lose your home. Secured loans offer a financial safety net to the lender. Because their risk of loss is lower, the loan is typically cheaper than unsecured options.
Debt management program (DMP)
A DMP is a structured plan to help you pay off unsecured debts. The plan is managed by a nonprofit credit counseling agency. It typically works like this:
Credit counseling to assess your situation and create a budget
Single monthly payment instead of multiple payments
Monthly payments for three to five years
Your creditors might agree to a lower interest rate but expect full repayment. You’ll likely be asked to stop using credit cards while you’re in the plan.
Bankruptcy
The two most common types of bankruptcy for individuals are Chapter 7 (liquidation) and Chapter 13 (reorganization).
If you can’t afford a monthly payment, you might qualify for Chapter 7. It’s often the quickest way to clear your debts. A Chapter 7 bankruptcy allows you to walk away from qualifying unsecured debts in a few months. The tradeoff is that you might have to give up some of the things you own, such as a second car or valuable artwork. The court can sell those things and give the money to your creditors.
If the court decides that you can afford a monthly payment, you’ll be directed to Chapter 13 instead. You won’t have to give up your assets, but the court will consider their value. You’ll be on a payment plan for five years (three years if your income is lower).
Most Chapter 7 cases are successful, but only about half of Chapter 13 cases are completed. In either case, bankruptcy is a legal process that can be complex, depending on your circumstances. It’s a good idea to work with a bankruptcy lawyer who can guide you.
Choosing the Best Path to Debt Freedom
The right way to approach debt settlement is to choose the method that works best for you. If that's negotiating on your own, that's great. However, it's also fine if you want to work with a professional who can help you sort your financial life.
For many people, the fees for professional debt settlement are more than worth it. Creditors can be difficult and even confrontational. But a reputable debt settlement company should already have relationships with most or all of your creditors. They can walk you through the process and do the heavy lifting when it comes to hammering out agreements.
What you shouldn’t do is pay fees that increase the total amount you have to pay back. For example, if a company negotiates a settlement for 80% of what you owe but charges you 25% for its services, you’re not better off. The Freedom Debt Relief Promise protects you from this outcome.
Freedom Debt Relief promises to refund up to 100% of their fees if your settlement and fees total more than the amount you originally owed.
Author Information
Written by
Dana George
Dana is a Freedom Debt Relief writer. She has been covering breaking financial news for nearly 30 years and is most interested in how financial news impacts everyday people. Dana is a personal loan, insurance, and brokerage expert for The Motley Fool.
Reviewed by
Kimberly Rotter
Kimberly Rotter is a financial counselor and consumer credit expert who helps people with average or low incomes discover how to create wealth and opportunities. She’s a veteran writer and editor who has spent more than 30 years creating thousands of hours of educational content in every possible format.
What if a debt collector claims I owe more than I believe I owe?
The first thing to do when a collection agency contacts you is validate the debt. The debt collector is obligated by law to provide information about the debt, proof that it belongs to you, and proof that they have the right to collect it.
You only have 30 days to request debt validation, so act quickly.
Don’t acknowledge that the debt is yours or make a promise to pay. Just ask them to validate the debt.
If you dispute the facts of the debt and they can’t prove that you’re wrong, they can’t keep trying to collect. If they take you to court without proof that the debt is yours, you could ask the judge to throw out the lawsuit.
Never send a debt collector a dime until you're sure you're on the same page.
What should my opening offer be if I'm negotiating on my own?
Start low so you have room to come to an agreement. If a debt is approaching the statute of limitations, even a low initial offer could settle the matter.
Do I have to prove financial hardship?
Typically, telling a creditor about what you're going through opens the door to negotiations. Gather any supporting documents you may have (like a layoff notice, unemployment payment, or hospital bill) to strengthen your case.