If you’re deep in debt and can’t afford your monthly payments, you have options to pay down your credit cards. Consumers struggling with credit card debt can turn to debt consolidation, debt settlement or (as a last resort) bankruptcy.

Debt consolidation is a good place to start. But if you’ve been missing payments, your credit score is going to reflect that because on-time payments make up 35 percent of your score. If your credit score is not considered good, or at least 670, it may not be as easy to secure a home equity loan, personal loan, or a balance transfer credit card with a 0 percent introductory APR to consolidate your debt.

If you have considerable debt and a lower credit score, debt settlement may be a good option. Let’s take a look at the process to negotiate a debt settlement, either on your own or with the help of a debt settlement agency.

Steps to negotiate a debt settlement

Negotiating to reduce your debt in a settlement agreement can help alleviate some of your financial burden and help you avoid bankruptcy. When you pursue a debt settlement, you negotiate with your creditors to reduce the total amount you owe.

Here are some things to consider before you pursue a debt settlement:

  • How much can I afford to pay?
  • Am I willing to stop making payments (and watch my credit score take a hit) so I can save up for a lump sum?
  • Should I negotiate myself or hire a debt settlement company?

Let’s say you’ve decided to go ahead and pursue debt settlement on your own. You don’t want to rush ahead and call all your credit card companies with an offer right away. Follow these steps to increase the odds of a favorable settlement.

1. Understand your debt

Before you make any calls to your creditors to negotiate a debt settlement, you’ll want to know exactly how much debt you owe and who the creditors are. Don’t just pick up the phone with the intention of figuring it out along the way. Get organized and aim to really understand the situation you are in so you can establish the best course of action when you’re ready to pick up the phone and call your creditors.

2. Establish your terms

Ask yourself how much you can afford to pay each creditor to eliminate your credit card debt. You’ll also need to have a plan for when you’ll be able to make the lump-sum payment.

Always make an offer that is less than the full amount you can afford. This leaves room for negotiation. It may help to write down the maximum payment you’re willing to make, and keep it in front of you during negotiations. Be careful of making promises you can’t keep or offering to pay more money than you can afford. You don’t want to stretch your budget too thin, with no money left for living expenses or end up defaulting on a debt settlement agreement.

Depending on how much you owe, it may take months or even years to save up enough to make your lump-sum payment. Keep in mind that if you plan to stop making payments while saving up, you’ll be stacking up late penalties and interest charges on top of what you already owe. While debt settlement agencies often require you to stop making payments to your creditors, if you negotiate for yourself you may choose to keep making the minimum payment to avoid additional fees.

If your creditor won’t accept your settlement offer, they may accept a payment plan or a few lump-sum installments. Spend some time beforehand thinking of a payment plan that would work for you in the event this comes up.

Also, remember to ask your creditor to report your debt to the three credit bureaus—Equifax, Experian and TransUnion—as “paid in full” instead of “settled” or “paid as agreed.” This will avoid a red flag on your credit report and may help you improve your credit score faster.

3. Call your creditors

Now it’s on to the hardest aspect of debt settlement: calling your creditors with a debt settlement offer.

If you’re already behind on your credit card payments, your creditors will be more likely to listen to your offer. In theory, if you’re already behind, you might stop paying altogether, and they’d probably rather collect a portion of your outstanding debt than none at all.

If your creditor (or a debt collector) has been calling you, start the negotiation by picking up the phone when it rings. Just make sure you’re in a place where you can speak without distractions. They will likely ask for payment in full, but be ready with your counter-offer for a lesser amount. If they don’t accept the offer, wait. It could take multiple phone calls to reach an agreement.

If your creditor accepts your settlement offer, you might be pressured to provide your bank account information immediately. You do not have to share this information. Say you’ll send a letter detailing the agreement and make the payment by the agreed-upon date.

4. Complete the deal in writing

Once you’ve reached a debt settlement agreement, send a letter to your creditor or the debt collection agency detailing the terms of the agreement. The letter should detail the settlement amount and add that the creditor agreed to accept the amount as payment in full for the debt. This is important to improve your credit score faster.

Send the letter registered mail and request a return receipt, so you know your creditor received it. Don’t forget to keep a copy for your records.

5. Make your payment

It’s important to follow through on the terms of the debt settlement and make your payment by the agreed-upon date. Make sure you understand exactly how to deliver the funds to avoid any issues. It’s advisable to mail the payment by check or money order or call to process a direct debit from your bank account.

Don’t send a postdated check or provide bank account information. While it is illegal for debt collectors to garnish your wages or deduct money from your bank account without permission, if they have your bank account information, unscrupulous debt collectors might do exactly that and take more than you agreed.

6. Follow up with the credit bureaus

Whatever the terms of your agreement, after you’ve made your payment you should obtain a free copy of your credit reports from AnnualCreditReport.com to make sure your creditor reported your account as agreed. If there is an error on your report, you’ll need to send a letter to the credit bureaus detailing the mistake and ask to have it fixed.

Hiring a debt settlement company

If the process of settling debt with multiple creditors or debt collection agencies sounds overwhelming, you may consider hiring a debt settlement company to do the work for you.

Some debt settlement firms may be able to negotiate a better deal than you could by yourself, thanks to their relationships with major debt collection agencies and creditors. Often, consumers who use a debt settlement agency save as much as they would have on their own, even after paying fees to the agency.

If you use a debt settlement firm, you’ll stop paying your creditors and make monthly payments to the agency instead. When your escrow account has enough money in it for a settlement agreement (plus the fees owed to the agency), the debt settlement firm will call collectors on your behalf to arrange payment. While you can negotiate a settlement with a creditor at any time, debt settlement agencies require your accounts to go delinquent for 90 days—and sometimes more—before they will begin negotiating.

Negotiating debt on your own isn’t easy. Depending on your situation and the amount of debt you owe, a debt settlement firm could help you save money and get out of debt faster. However, debt settlement is a largely unregulated industry. Many debt settlement firms are not honest; some are outright scams. Read online reviews and check the Better Business Bureau listings before choosing a debt settlement company.

Is debt settlement right for me?

If you’ve been making the minimum payments for your credit cards on time, and your credit score falls in the good to excellent range, you may explore debt consolidation options, instead. You can use a personal loan, home equity loan, or a credit card with a zero percent introductory APR on balance transfers to pay off your debt.

If you feel that learning some financial skills and sticking to a budget may be enough to help you get out of debt, consider a credit counseling service. A not-for-profit credit counselor can help you establish a debt management plan, which is a specific form of debt consolidation based on your unique financial circumstances. With a debt management plan, your credit counselor evaluates what you’re able to afford and negotiates with your creditors for lower monthly payments, lower interest, and/or waived fees and penalties. You make monthly payments to the credit counseling agency, which pays your creditors per the terms of the agreement.

The bottom line

Debt settlement is a viable alternative to bankruptcy for many people. If you have a clear plan and believe yourself to be a strong negotiator, you can tackle the task on your own. Otherwise, a debt settlement company can save you time, stress and money. Before committing to a third party, make sure to read consumer reviews and select one with a solid reputation. Be aware of the ramifications of debt settlement for your credit score before you proceed, and weigh the consequences against the money you could save.