Getting rid of all or a part of your personal debt through settlement may look like a daunting task, especially when you feel like you’re buried under tons of debt. But the good news is everything is negotiable in the world of finance. Welcome to the world of debt settlements. Yes, it’s possible to negotiate with your lender and get your debts settled by paying a part of the outstanding balance. 

But, are you not sure whom to approach for debt settlements and how to ask? Worry not, we’ve got you covered! Imagine you owe balance on your credit card and you’re unable to repay it in full. Here there might be an opportunity to negotiate on what you actually owe. With good persuasion skills and the right know-how, you can cut your balances by as much as 40% to 70%. In this guide, we introduce you the pros and cons of debt settlements, how to negotiate with the lender to land a favourable deal and much more. 

Additional Reading: How to settle debt & remove it from your credit report?

What is debt settlement?

Debt settlement is an agreement between the lender and the borrower to pay off a lump sum amount as a one-time payment. It’s paying a part of the existing balance in return for the forgiveness of remaining. 

Let’s explain with an example. Let’s say you owe Rs. 50,000 on a single credit card. You can approach the lender and offer to pay Rs. 25,000. In return for the one-time payment, the lender agrees to forgive and erase the remaining balance still owed.

But why would anyone let go of the money that they are owed? Let alone a credit card issuer? It can be for two reasons. Either the lender is strapped for cash or they fear that you may not pay the entire balance later. In both scenarios the credit card issuer is trying to save its financial bottom line. Always remember this while beginning to negotiate.

Credit cards act as an unsecured loan, which means that you do not offer any collateral to your credit card company or a debt collector which they might later use to claim for the unpaid balance. If you are unable to pay the balance on your credit card then you can negotiate with your credit card issuer stating genuine reasons on why you cannot repay. Though it may sound easy to negotiate, however, it’s not. 

Debt settlement is the last resort for lenders. Initially, they try to recover the entire outstanding balance owed by the credit cardholder. Only if that isn’t possible, they go for debt settlement. However if you are really on the dead end, at the verge of bankruptcy then its logical that your lender may be willing to go for debt settlement to recover at least a part of the outstanding balance. 

The Disadvantages of Debt Settlement

You may think that debt settlement is your one way road to get out of debt but outside that road awaits some serious downsides. Missing the signs of potential downside of debt settlement can damage your credit report severely. 

Although by negotiating, borrowers can approximately cut down the balance from 40% - 70% of their debt. But to attain that, borrowers will need to arrange for a lump sum amount to be given as one time payment to the lenders as settlement. This is what attracts the lenders because here instead of getting minimum monthly payments they are being offered a lump sum amount.

Then the next thing to consider is having your credit card account closed permanently after the settlement. That means that you may no longer be a client to your lender because of your poor track record of repaying what you owe to them.

And finally, and the most obvious fact that debt settlement will affect your credit score majorly. This will make it difficult for you to borrow in the future. Debt settlement stands out as a blackmark on your credit report and continues to impact your future loans and credit card approvals. And even if you land yourself a loan, then the interest rate will be much higher than normally offered.

What to do if debt settlement is the only option?

If you have completely made up your mind that debt settlement is your only way out then the next step will be to choose between doing it yourself or hiring a professional to negotiate for the debt settlement. Note that you know your problems better than anyone. You being their client, the lender is obligated to deal with you. So, you can try negotiating on your own with the lender. However, if that is too time-consuming, you can always hire the services of a reputed credit repair agency. 

Debt settlement can majorly affect your credit report, making it difficult for a borrower to borrow money at reasonable interest rates.

The  main purpose to negotiate is to put forth the fact that the borrower is financially in a bad position. Here is something you can do to build your image in the eyes of the lenders. In the remaining last few months of your card statement, cut your expenses for at least three to six months prior to requesting a settlement. This will make your lender consider you worthy of sympathy. 

What does the negotiating process look like?

First, you have to get in contact with the customer care service department of the credit card company/lenders. Ask them if you can speak to the bank official or the manager in the debt settlement department. Explain the severity of your situation. Make it obvious that you have arranged a part of money in regards to settlement of the account before the money gets used up elsewhere. If you have, you can also mention that you have multiple accounts on which you are pursuing debt settlement. This way you are more likely to get a competitive offer.

You can start by offering 30% of your outstanding amount on the account balance. The creditor will probably try increasing it to a higher percentage, but if it is below 50% then you can consider settling.

Finally after both the lender and the borrower have finalized the debt settlement, be sure to get the agreement in writing. Don’t just assume with a verbal agreement of a debt settlement. Check that the written agreement spells out the amount that has been finalized as debt settlement in return of your entire balance to be excused from further pay.

Key Points on Debt Settlement

  • An agreement between the lender and the borrower to pay off an amount as a one-time payment instead of an existing balance in return for the forgiveness of remaining debt is called debt settlement. 
  • A lump sum amount shall be needed for the one time payment to settle the debt.
  • If choosing a professional to settle on behalf of you choose wisely as this may be your one shot.
  • If you are going to settle by yourself then get in contact with the manager in the debt settlement department and start by negotiating 30% of your outstanding balance.


Negotiation should be encouraged among the borrowers who are financially in a bad position. But there is a good possibility that you’ll hear ‘NO’ from your lender. But it's worth a try. Don’t give up. 

If debt settlement is not possible, you can try other options to reduce your outstanding debts:

  • Reduce the monthly minimum payments 
  • Alternate payment plan 
  • Ask for temporary pause in loan/credit card repayments until your financial situation gets better

There are good chances that the lender might agree to one of these options because of your situation. Alas, if all this doesn't help, especially if you owe a lot across several credit cards then you can consider trying debt consolidation