How To Guide: Do It Yourself (DIY) Debt Settlement

March 11, 2024 Debt Relief

Key Takeaways

  • DIY debt settlement allows you to settle debts without hiring a company. Steps include assessing total debts, budgeting, finding reduction solutions, avoiding new debts, and negotiating with creditors.
  • Knowledge is key in DIY debt settlement. Understanding debt, credit scores, and negotiation techniques can lead to successful debt settlement and credit repair.
  • If DIY debt settlement feels overwhelming, consider hiring a debt settlement company or coach for guidance and aggressive negotiation with creditors.
How To Guide: Do It Yourself (DIY) Debt Settlement

Debt is a serious problem that affects 8 out of 10 Americans. When you are struggling with outstanding debt, it may seem impossible to find the right solution for getting rid of it for good.

While there are many avenues you can take, including enlisting the help of a debt relief service for debt consolidation and debt reduction, you can actually settle these debts yourself.

What Is Debt Settlement?

Debt settlement is a process in which you can pay back your creditors with a one-time payment for the amount you are able to pay while they forgive the rest of the unpaid debt. This doesn't allow you to purposely pay less than your full amount owed -- you must be in severe financial crisis for banks and debt collection agencies to agree to only take what they can get.

One of the advantages of DIY debt settlement is that you do not have to pay any fees when hiring a debt settlement company, which allows you to keep that extra cash you may need. However, debt settlement companies generally know the loopholes when it comes to dealing with creditors and can negotiate aggressively when needed.

If DIY debt settlement is a route you are ready to take, read on to learn our best tips and tricks for a successful process.

Step 1: Calculate Your Total Debts

You must know your types and amount of debt before you can find the right options for reducing it. You can begin by collecting and organizing all of your financial statements.

You will also need your credit reports from the three major bureaus (Experian, Equifax, and TransUnion), which you can acquire at These help you record your balance, interest rates, and monthly payments for information regarding your credit cards, loans, and any other kinds of debt.

Step 2: Budget And Save

Now that you know where you stand with your debts, you should create a monthly budget of your living expenses and stay within those means. Keep track of your rent, mortgage, utilities, grocery bills, credit card payments, insurance, and any additional loan payments.

Anything that is left over should be used to pay off your debts. If you do not have enough to make regular contributions to paying off your debt, you may have to cut back on spending.

Save up as much extra money as you can to create a savings fund and use this one lump sum to pay off your creditors.

Step 3: Find Solutions To Reducing Or Consolidating Your Debts

With the calculated remaining amount, focus on paying off debt with the highest interest and balance. When that is paid off, move onto the next highest debt and interest rate and continue this cycle until you have paid off as much as possible.

If your credit score is high enough, you may be able to transfer your credit card balances to a balance transfer card. These cards usually have 0% APR for 6 to 12 months but you'll still want to avoid adding any new charges. If you do use your available credit lines, keep them below 30% usage in order to prevent damage to your credit score.

You may also want to consider taking out a personal loan to pay off your high-interest debt or consolidate all your debts to make it easier to pay off in one lump sum.

Step 4: Avoid Creating More Debt

During this time, do not take out any new credit lines and avoid using your credit cards as much as possible.

Step 5: Begin Negotiations

Now you can begin to contact your creditors individually to see if they can change the terms of your debt in your favor, but there are few factors to keep in mind:

  • Knowledge is power. Know your options, rights, and be aware of the alternatives to debt settlement, such as bankruptcy, that will help you sound knowledgeable to your creditors.
  • Consider hiring a debt settlement coach who will guide you on the following: how much money you need, the timeline of your debts, how to communicate with your creditors, whether or not you will face aggressive creditors, what strategy to use to approach settlement, and other important financial information regarding negotiation.
  • You can consult a lawyer or additional court program to learn about your legal rights when it comes to negotiating.
  • Research your creditors. Some creditors only accept a certain percentage of settled debt.
  • Aim to negotiate as soon as possible. If you have an account that is six months overdue, you may have to settle it with a collection agency or debt buyer hired by your creditor. Creditors may even sell your debt to an attorney who is able to sue you for the money you owe.
  • Contact your creditor’s customer service department to see if you can negotiate your debts to reduce your settlement or have a lower interest rate. Any of your debts in collections or any debts that were charged-off will be much easier to negotiate with creditors.
  • Keep all your personal and financial information on hand when speaking with your creditors.
  • Speak calmly. Discussing your finances in a rational manner makes it more likely for you to get results. Explain your financial situation in detail and be sure to mention if you have faced any setbacks like losing a job.
  • Consider all your options regarding the maximum amount of settled debt you can pay and how long you anticipate it will take.
  • Don't start your negotiations too low or too high. Your creditor will likely counter your initial offer and you may not be able to afford a high settlement. If you settle for a high amount and can't pay it, this will further aggravate them. Be realistic about your goals but don’t sell yourself short.
  • Prepare a counteroffer. Since creditors generally reject the initial offer, have a second offer in mind, such as one that explores another alternative to debt settlement if you and your creditor cannot reach an agreement.
  • If your debts are sold to a debt buyer or collection agency, you may be more likely to settle your account.
  • Obtain your creditor’s agreement in writing before making any payments. Get a physical copy of the letter that details the payment amount, payment date, and the creditor’s terms and agreements. Once you do this, be sure to stick to the agreement.
  • Be sure to pay the correct taxes on forgiven debt. The IRS may send you a letter specifying that the forgiven amount of debt is considered income, which is a tax liability.
  • Monitor your credit regularly and make sure any changes to your accounts are correct.
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Step 6: Repay Your Debts

Once your debts are settled, aim to repay as much as you possibly can every month until your debts erased.

DIY Settlement May Not Be For Me

If you have trouble getting results or if you are not ready to approach debt settlement alone, you can look to our top rated debt relief services.

What are some other debt relief options?

If you are deep in debt but want to explore other options, then you may be interested in alternative forms of debt relief:

  • Consumer credit counseling: Credit counseling can help you enter a debt management plan with your creditors and give you the opportunity to reduce your monthly payments while still paying your full balance.
  • Hardship plan: You can work out a payment plan with your creditors in the case you have missed a couple of payments. Be sure to ask for a hardship program if you have any financial difficulty. This could help you receive a reduced payment for six to twelve months.
  • Bankruptcy: Declaring bankruptcy is another way in which you can take care of the overwhelming debt. Unfortunately, this hurts your credit even more than debt settlement. A Chapter 7 bankruptcy stays on your credit report for up to ten years, while a Chapter 10 bankruptcy and debt settlement only stay on for seven years. A Chapter 7 bankruptcy can take care of unsecured debt but your income can't be above a specific amount to qualify. Even if you do qualify, you may have personal property possessed that goes towards the amount you owe. A Chapter 13 bankruptcy stays on your credit report for seven years, does not have required minimum income, and requires you to pay your creditors for up to five years. This payment is just one monthly payment based on your income and expenses paid to your creditors. Once this period is up, your debts are considered settled.
  • Debt consolidation: This method of debt relief consolidates your unsecured debt (such as credit cards)and lets you pay off your creditors with a personal loan. Over time, you will have one single (ideally low-interest) loan instead of many debts with different payment dates and interest rates.
  • Secured loan: You have the option of taking out a secured loan, which is backed by collateral like your car or other valuable personal property. This is riskier than an unsecured loan since lenders may collect your property if you default on your payments.
  • Negotiation: You can try negotiating your debts yourself with your creditors. Although this isn't as effective as hiring a debt settlement company, it is an option you may want to explore before going through with hiring a company.

Will I have to pay taxes on forgiven debt?

The IRS code states any forgiven debt from a creditor should be treated as income. However, if you are unable to pay any of your owed debts and your insolvency was greater than the amount of debt settled, you are not required to pay taxes on the amount of debt relieved. Either way, you must attach Form 982 to notify the IRS when you file your tax return.

About The Author

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Bryan Huynh

Product Tester & Writer

Bryan Huynh, a committed Product Tester and Writer, ensures that you are well-informed, guiding you in discovering and comparing top-rated financial services, including personal loans, business loans, credit repair, and tax relief.