Credit card debt settlement involves satisfying your credit card debt by paying less than you really owe. Credit card debt settlement ranks low on the list of desirable debt solutions, but it's one that some people must use to pay off debt and avoid bankruptcy.
How Credit Card Debt Settlement Works
There are two methods of credit card debt settlement: through a credit card debt settlement company or on your own. Credit card debt settlement companies should be avoided. They collect your payments for months before making a settlement offer - if they make an offer at all. Meanwhile, you continue receiving collection calls and negative payment marks on your credit report. You'll get better and faster results settling debts on your own.
Credit Card Debt Settlement Payment Amount
Before you can settle your credit card debt, you have to decide how much you can pay. Credit card debt settlement can typically be done for 10% to 60% of the outstanding balance, depending on the creditor and age of the debt. The more delinquent your account, the lower the amount creditors are willing to accept to satisfy the debt.
Lump-Sum vs. Multiple Payments
You pay in one of two ways - multiple payments over time or a single lump-sum payment. Creditors prefer a lump sum or few payments (like 2-3) and are less likely to agree to a settlement that has to be repaid over several months. Figure out how much of the debt you can pay immediately and offer that. Once you're negotiating with your creditor, offer an amount lower than what you're actually willing to pay. That way, you have some wiggle room if your creditor wants to negotiate up.
Negotiating a Credit Card Debt Settlement
Once you have a credit card debt settlement offer, call your credit card company and to talk to a manager, someone in a loss mitigation, or similar department. The customer service representatives you first speak with are usually not authorized to take credit card debt settlement offers and you will always be told "no" when they couldn't say "yes" if they wanted.
During the call, make sure you write down the name, phone number, and extension of the person you talk to. Also record the date and time of the call and the outcome. Don’t give up with a single phone call. You may get different and often conflicting answers from different people at the same creditor and sometimes even the same person on different days.
Credit Card Debt Settlement Watchouts
Your credit card company might close your credit card after settling your debt. That's if your credit card hasn't already been closed. You could also have your credit limit reduced or eliminated all together once the creditor realizes you don’t plan to pay the balance in full.
Credit card debt settlement typically requires you to be a few months behind on your credit card payments. At that point in time, your credit score will take a severe hit. The effect will be worse if you’re late on more than one credit card.
The federal government requires you to pay taxes on cancelled debt, including debt that's been cancelled through credit card debt settlement. The bottom line, you owe the federal government more money which means you’ll get a smaller refund check or owe more money to the IRS.
Finalizing Your Settlement Offer
Final credit card debt settlement agreements should be in writing. Either draft an agreement of your own or have your credit card company send you an agreement. Make sure you and someone from your credit card company have both signed the agreement before you send payment.