Before Jennifer Smith’s (not her real name) store went out of business, she had perfect credit: no missed payments and no problems with massive debt. But after the business went under, she found herself with nearly $65,000 in debt on personal credit cards she’d used to keep her business afloat.

“I was completely freaking out thinking I was going to have to file bankruptcy,” Jennifer says. “I had perfect credit prior to this financial meltdown and was beside myself knowing I would not be able to pay my bills.”

Luckily, Jennifer ran across a debt settlement program from Harvey Warren (author of Drop Debt). Unlike debt settlement companies that do the settling for customers, the low-cost program taught her to settle her own debts.

Using the advice from the $10 program, she settled a $35,000 bill from Citicard for $9,000, and two $6,000 bills from Chase for about $1,250 each. She’s in the process of settling one last card from US Bank, after which she can begin rebuilding her credit and financial life.

Jennifer is not the only one to settle for pennies on the dollar in tough financial times like these.

“The banks know people are going through hard times,” she says, which means they’re willing to negotiate with customers who ask for help.

Could You Settle Your Own Debt?

According to Jennifer, settling your own debts isn’t that difficult. But it does take emotional stamina and the desire to see it through. Other debt settlement experts agree.

Cynthia Johnson Rerko, a lawyer specializing in financial restructuring, including lump sum debt settlements, says that if you want to settle your own debts, you’ll “need to draw on all of your inner strength … and your social skills once you start calling your creditors in order to try to settle your debts.”

Stopping payments, getting cash together for lump sum settlements, and dealing with sometimes-obstinate creditors can be difficult, to say the least. But if you can handle the emotional turmoil and follow a few basic steps, you can most likely settle your debts on your own, without the help of a potentially shady or expensive debt settlement service.

Tips From the Experts

We’re not saying that settling your own debts is ever easy. In fact, it can be one of the hardest things you do financially. It takes lots of time, time during which you aren’t making even minimal debt payments, and during which your creditors will be hounding you daily.

But settling your own debts can be worth your while if you’re in way over your head, like Jennifer was and like many of Rerko’s clients are. So if you’re in an untenable debt situation and want to avoid filing for bankruptcy, use these tips to settle your own debt:

1. Remove Emotion From the Equation

As Jennifer can attest, the debt settlement process is emotionally harrowing. We’re all rightly taught that debts are meant to be paid, and stopping payment on those debts can seem immoral and scary.

Plus, creditors often use dirty tactics to get your emotions up, either anger or fear. Oftentimes, these tactics are illegal, but creditors use them nonetheless.

Rerko suggests that before pursuing debt settlement, you take emotions completely out of the equation. “This is about business, your business,” she says. “Do not let creditors intimidate you or talk to you in anything other than a professional tone of voice with a professional approach to finding a solution.”

2. Understand That It Will Take Time

Some people think settling debts will take just a phone call and a couple of months. But this is, unfortunately, untrue. Jennifer was able to settle some of her credit cards months ago but is still working on settling the last debt. The key is to keep at it, even if you have to talk to the creditor several times before reaching a settlement agreement.

“Recognize that you are probably not going to get a satisfactory settlement in your first phone call,” Rerko says. “Your call even expressing a desire to try to settle your debt is the carrot that should keep the creditor negotiating with you.”

You may have to keep this carrot dangling for quite a while, but most creditors will eventually bite.

3. Stop Making Payments

This point is crucial: Creditors will never agree to settle a debt if you continue making even minimal payments. Remember, the goal of the collections agent is to get as much money out of you as possible. So if you’re making payments, the creditor has no incentive to settle with you.

If you stop making payments, though, creditors will usually be open to negotiation. They know that if you file for bankruptcy, they’re likely to get next to nothing. This motivates them to accept the cash you have available as you seek to settle your debts and avoid bankruptcy.

Of course, there are risks when you stop making payments. Your credit score can plummet, and creditors can decide to peruse claims through litigation.

4. Save up Reasonable Lump Sums

If you have some cash on hand, you may be able to settle right away. If you don’t have any liquid assets, you may need to take the money you’re now not paying to creditors and throw it into a savings account.

According to Rerko and other debt settlement experts, “Cash is king with creditors. . . . [The] creditors are probably thinking that they are going to have to write off, also known as ‘eat’ the entire balance that you owe them.” Because of this, you can often settle a debt for pennies on the dollar, as Jennifer did, when you pay in cash.

Jennifer also notes that lump sums are important. Her settlement program “explained to avoid payment plans because if I blew it due to unforeseen circumstances, I would be even worse off financially and credit-wise.”

So if you don’t have cash on hand right now, stop taking calls from creditors until you do. Sell what you can and save what you can. When you have some cash available, you can offer it to your creditors as a lump sum payment.

5. Let Your Wallet Be Your Guide

How much you can offer as a lump sum payment depends more on what you can afford than anything else. Jennifer’s debt settlement program said “[that] my wallet dictated what I should pay, not what I owed or what [creditors] would try to negotiate with you.”

Creditors will try to make counteroffers to get a larger settlement. But if you can’t pay more, you simply can’t pay more.

Rerko advises that debtors “[divide] the total amount you owe by the amount of cash you have on hand to settle your debts. For example, if you owe $6,000 to your creditors and have $1,700 in cash available to settle your debts, then you have 35.3 cents with which to settle every $1 of debt.”

As Jennifer can attest, creditors will often settle for 35 percent — or even much less — of what you owe them. The key is to keep offering exactly what you can afford and no more.

6. Have an Alternative Plan

Debt settlement is often a better option than bankruptcy for people with high debt and low means. However, settlement doesn’t always work. If it’s not going to work for you, you may need to have an alternative plan.

Rerko notes that debt settlement works best when you have cash on hand, or can quickly get cash, with which to settle your debts.

Otherwise, you may want to consider filing for Chapter 7 bankruptcy, which could discharge most or all of your debts, giving you a fresh start financially. Another option is Chapter 13 bankruptcy, which could restructure your debt payments to put them at an affordable level for you.

If you do decide to file for bankruptcy, you’ll certainly need to consult with a qualified lawyer about your options.

7. Have a Plan to Rebuild Your Credit

Personal debt settlement is no picnic, and it will certainly take a toll on your personal credit. After all, you’ll have to stop making payments for any number of months while you’re settling your debts. And once the debts are settled, your credit report will likely show that they were settled for less than you owed — a black mark that will stick around for years.

But don’t lose hope. Settling your debts quickly can often have less of an impact than filing for bankruptcy. What you need is a plan for rebuilding your credit after you’ve settled your debts. For more information on that, look at our credit section on Dough Roller, which is packed with tips and advice for building and rebuilding personal credit.