How to Negotiate a Debt Reduction

Careful negotiation can reduce your debt.

Careful negotiation can reduce your debt.

If you're looking at a pile of bills and wondering how you'll ever pay them off, it's time to cut a deal with your creditors. If you have some cash on hand, ask your creditors if they'll cancel part of your debt in exchange for a lump sum settlement. While creditors would rather get all the money you owe them, they know that they won't get much of anything if they have to charge off the debt or you declare bankruptcy.

Prepare to Deal

Gather all your bills and set them aside. If you pay your bills online, print out a copy of your most recent statements and add them to your bill-pile.

Figure out how much cash you have, right now, for paying off creditors. Never attempt to negotiate a debt settlement with money that you don't have: You'll hurt your credibility if you can't pay your settlement because you never actually had the money. If you have to borrow the funds from a family member or bank, secure the loan first before you begin to deal.

Look at your debts and figure out where you can save the most money. While it may make sense to settle the largest debts first, because your net savings are greater, check out your interest rates too. Your high-interest credit card may have a lower balance than that medical bill, but over time, the credit card debt may cost you a lot more than the high-balance, low-interest doctor's bill.

Grab your three-ring binder, paper and dividers and set up your record-keeping system. Establish a section for each of your creditors, using the pocket dividers to hold your bills and correspondence. Start each section with a page that includes the creditor's name, address and phone number.

Decide what you are going to offer on each of your debts, making sure that you actually have the cash to promptly pay your settlement. Figure out a low and a high offer so you have some room for negotiation. For example, you might want to initially offer 40 percent of the debt's value, with a willingness to pay as much as 60 percent of what you owe. Write down your high and low amounts for each creditor in your notebook so you don't get flustered or confused during negotiations.

Contact Your Creditors

Call your creditors and pitch them an offer. Restrain yourself from getting emotional and offering sob stories -- they've heard them all before -- but don't hesitate to explain circumstances, such as a sudden job loss, that bolster your claims of financial hardship. Make sure to tell them that you are in a position to offer a cash settlement and that you can pay them right away if they agree to work with you.

Write down the date and time of your call, along with the name and, if available, extension number of the representative with whom you speak. If the representative declines your offer, but offers you another concession, such as an interest rate reduction, write that down, too.

Send a letter to creditors who resist negotiation. Explain that you are in a bad place financially, but that you do want to honor your obligations. Make your offer again, and urge them to accept it.


Request a written settlement agreement, on company letterhead, from your creditor. Don't send any money until your creditor faxes, e-mails or snail-mails this to you.

Send your payment to the creditor promptly. To avoid hassle and confusion, pay a few extra bucks for certified mail or delivery confirmation.

Order your credit reports four to six weeks after you successfully settle your debts. Make sure that your former creditors are properly reporting your account with a zero balance.

Items you will need

  • Your bills, including the names and addresses of your creditors
  • Three-ring binder with pocket folders and ruled paper
  • Stamps, paper and envelopes
  • Your checkbook


  • If some of your creditors are collection agencies, you may want to begin your negotiations with them: Debt collectors typically work on commission and many collection agencies actually buy their debt accounts for a few cents on the dollar. making them far more open to negotiation than other creditors.


  • Debt settlement has two downsides: The first is that you may have to pay taxes on the canceled debt. The second is that your credit score may take a hit if your creditors report your account as “settled for less than amount owed.”

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About the Author

Lainie Petersen writes about business, real estate and personal finance, drawing on 25 years experience in publishing and education. Petersen's work appears in Money Crashers, Selling to the Masses, and in Walmart News Now, a blog for Walmart suppliers. She holds a master's degree in library science from Dominican University.

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