What Percentage Should I Offer To Settle Debt?

Understanding Debt Settlement: What Percentage Should I Offer To Settle Debt?

In today’s financial landscape, the question on many people’s minds is, “What Percentage Should I Offer To Settle Debt?” If you find yourself in a situation where you cannot pay off your debt in full, it might be time to consider debt settlement. But how do you determine an appropriate offer? This comprehensive guide will walk you through the process.

Evaluating Your Financial Situation

Before you can determine what percentage to offer for debt settlement, it is crucial to assess your financial situation. Don’t commit to an amount that is beyond your means. A debt settlement agreement is a legal contract, and if you fail to meet its terms, the deal can be rendered null and void. The first step is to review your budget and identify a monthly amount that you can afford to pay.

If you enlist the help of a Licensed Insolvency Trustee to settle your debts through a consumer proposal, part of their role will be to review your financial circumstances. This includes your income and expenses to ensure that the proposal payments are affordable for you.

Types of Payment Offers

When negotiating a debt settlement, there are two main types of offers you can make: a lump-sum payment or a payment plan. Typically, creditors are more inclined to accept a lower payout percentage if you offer to make a lump-sum payment as opposed to disbursing payments over a span of months or years.

If you choose to negotiate directly with a debt collector, aim to have the debt fully paid off within two to three years. Larger debts, generally above $10,000, often necessitate longer payment plans, usually spanning three to five years.

Understanding Debt Collection Settlement Percentages

When your payments are overdue, your account can be sent to collections. At times, your creditor’s internal collections department will handle the situation initially. If the debt continues to age, it may be referred to a third-party collection agency. Once your debt has been transferred to a collection agency, you must deal directly with the debt collector.

If you have a single or a couple of accounts in arrears, it might be possible to negotiate a debt settlement on your own.

Negotiating with Original Creditors

If your account is still with the original creditor, they may be reluctant to negotiate a settlement for less than what is owed. Original creditors typically won’t accept an offer of less than 70% to 90% of the outstanding balance, unless the offer is made through a formal debt settlement program.

For instance, if you have a significant credit card debt that is causing financial strain, your credit card provider may be unwilling to agree to write off part of the debt voluntarily. You might be able to negotiate a freeze on interest or a reduction in the interest rate, but original creditors generally won’t agree to reduce the principal amount unless you are several months behind on payments. By that stage, your account is likely already with a debt collector.

Dealing with a Collection Agency

A collection agency, acting on behalf of a creditor, might be willing to accept up to 50% of the debt as a settlement offer. Debt collectors earn a commission based on the amount collected, but they also maintain their business relationships with various creditors by securing higher repayment settlements. Some creditors impose limits on the reduction percentage that a collection agency can authorize.

The percentage a debt collector will accept depends on several factors, including your financial hardship, the total amount of debt you owe, and the age of the debt. Here are some considerations a debt collector will make before accepting or declining your offer:


Your income: If you are unemployed or have a limited income source, a debt collector may be willing to settle for less. However, if your income can be garnished, the collector has less incentive to accept a lower deal.

Total debt: The total amount of debt you owe also plays a role. If you owe a small amount, a creditor is likely more willing to negotiate as it wouldn’t be cost-effective for them to take you to court. The more you owe, the more likely a creditor or debt collector would be to pursue court action to obtain a judgment and a garnishment order, making it harder to negotiate a settlement.

Age of the debt: The age of the debt is another factor. Creditors are more likely to demand 70%-80% of the debt repaid if it is about a year old. However, a collection agent is usually more willing to accept less for older debt.

Type of debt: Certain types of debts can only be compromised in a consumer proposal, including monies owed to the Canada Revenue Agency for tax debts and Canada student loans.

Owned assets: If you own property or other assets that the creditor is aware of, they will be less likely to negotiate a settlement. They would prefer you to use your assets to repay your debts.

Active garnishment: If a creditor has already garnished your wages, they won’t want to negotiate a settlement for less. At that point, you will need to file a consumer proposal or bankruptcy to stop the garnishment if you can’t repay the full debt.


When Your Debt is Sold

Sometimes, a debt buyer buys old debts from creditors for a fraction of the original amount. These debt buyers may be willing to accept a significant reduction in the amount owed, often less than 50%.

Crafting Your Offer

When crafting your offer, consider the age of the debt, the total owed, and your capacity to pay. If your debt is old and small and you have a valid explanation for your inability to pay, you might start by offering between 20% and 30% of the outstanding balance. Be ready for a counter-offer and understand your position, including how much you can afford to repay. Keep track of all offers and ensure you get any agreement in writing before making any payments.

Weighing Settlement Against Full Payment

Missed payments remain on your credit report for six years from the date of your last payment or acknowledgment of the debt. A settlement offer can improve your score because you are now making payments on settled debts again. However, if you have not been making payments for 4 or 5 years, consider that the debt will fall off your report shortly if you do nothing. In such cases, it might be better to ignore the calls.

Clearing up that debt through a consumer proposal can also improve your credit rating if you have significant debt. While a note that you filed a proposal will appear on your credit report for up to six years, reducing your debt will help you rebuild your score since continued high debt utilization can harm your credit score long term.

Reducing Debt by 70% to 80%

If you have one or two small debts and room in your budget, you may be able to work directly with your creditors to arrange a settlement plan. However, if you have multiple creditors or your budget isn’t big enough to pay off your debts, you need additional debt relief.

One option is to negotiate a settlement through a consumer proposal arrangement. A consumer proposal is a legislated debt settlement. It is an offer that is fair and reasonable to your creditors and affordable to you. Depending on your circumstances, a consumer proposal can offer up to an 80% reduction in your debt.

Your settlement offer in a consumer proposal will depend on your income and the value of any assets you owe. Generally, consumer proposal offers of between 20% and 50% of your outstanding debt balances are the norm.

A consumer proposal differs from a debt management plan through a credit counselor in that you can settle debts for less than you owe. Credit counseling requires that you repay your debts in full. A consumer proposal allows you to avoid bankruptcy yet repay less than you owe. In a consumer proposal, you keep your assets. After your proposal payments are completed, the remaining debt is forgiven, and you are debt-free.

Understanding Debt Settlement Companies

What about a debt settlement company or debt consultant? A for-profit debt settlement company offers two types of settlement services; however, each can lead to unnecessary costs.

Debt settlement companies may offer to negotiate with creditors on your behalf, but most charge significant fees regardless of your ability to pay.

Informal debt settlement companies can only ask creditors to participate voluntarily. You will still receive collection calls during this process as the creditors won’t wait, and creditors can still take you to court and have your wages garnished.

We also caution against working with debt consultants who offer to help you file a consumer proposal. They charge you high extra fees and cannot, despite what they claim, get a better deal than you can when working directly with a trustee.

Seeking Professional Debt Advice

If you are struggling with debt, the best place to start is with a reputable Licensed Insolvency Trustee. They are licensed by the government and are the only people who can help you file a consumer proposal or a bankruptcy. When you call, they review all your options and help you find the right debt solution to deal with your debt.

Find Your Personal Debt Relief Solution

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