How To Settle Credit Card Debt

Credit card balances can swiftly spiral out of control for any number of reasons. Unexpected issues such as losing your job, getting divorced or encountering a medical issue, or simply some bad spending decisions or risks that didn't pan out creates insurmountable debt. Credit card debt carries a high interest rate and can get out of hand very quickly.

The bottom line is that when your finances are tight, and the money you owe is not going away, you need to be proactive and not bury your head in the sand.

You've already taken your first step in the right direction by visiting this website. That's an important step. You can't solve a problem until you admit that you have one and do your best to understand it and develop a practical plan to deal with the situation.

One option is to try to negotiate a settlement. In other words, see if your creditors will agree to you paying less than what you owe to settle the debt.

While it may sound too good to be true, there are occasions when companies will agree to such a settlement. The best part of all is that you can do it yourself without having to pay someone to help you.

First, we should point out that settlement is not an option for everyone. The company will want to be sure that you are genuinely experiencing financial difficulty, and not just looking for a quick way to reduce your debt. So, if you are financially stable and just want to get out of paying, don't bother to try to secure a settlement agreement.

Secondly, the company is under no obligation to agree to a settlement, so you should prepare yourself for the possibility of rejection.

Why would a company agree to a settlement?
The primary purpose of credit card companies is to generate profits for their parent companies, which are usually banks. Therefore, you might think that they would pursue outstanding debts to the very end. The truth, though, is that when you are in a position of financial difficulty, and it looks almost inevitable that you are going to renege on the debt, the company's focus switches to getting as much of the outstanding balance back as possible. That is because if you declare bankruptcy, the unsecured nature of credit card debt means a bankruptcy will almost certainly wipe it out, which is the worst-case scenario for the company. If it looks like there's very little realistic chance you are going to repay the balance, a settlement can be a preferable option for your creditors.

Be prepared with all the financial facts
To start the process, you are going to need to contact your credit card company. Be ready to either call them, write to them or both.

This stage can feel frustrating as you'll likely to speak to different people over some time but don't let that deter you. These conversations, while sometimes disheartening, are important because they are your opportunities to explain your situation to your creditors.

Before you make contact, make sure you have your financial data on hand in case you need to refer to it. You're going to need to show where your money is going each month, which is why it's a good idea to go through your monthly income and expenses beforehand. Do not invent any fake expenses to make your situation seem worse than it is. You may be required to show your income and outgoing spending records, so any nonexistent payments are going to harm your credibility and reduce your chances of successfully securing a settlement. The companies are experts in this process, and they will almost certainly discover any attempt to cheat.

Explain that you don't want to have to file for bankruptcy, but it could be your only option going forward, and you'd rather they get some of the money you owe back via a settlement than none at all.

What types of settlement are available?
If your credit card company is willing to agree to a settlement, there are three main likely outcomes:

A lump sum settlement uses a work bonus, inheritance or savings to make a one-off payment against your debt. Such an arrangement could see the company settling for as much as 70 percent off what you owe them.

A structured repayment plan after a lump sum payment, this is the second most likely arrangement. It will have your outstanding balance frozen and a structured repayment schedule arranged, often at a lower interest rate.

A temporary forbearance program if you've lost your job or encountered other temporary difficulties, a forbearance agreement will allow you to make smaller payments or no payments at all for a limited time. The company may even lower the interest rate on your debt as part of the forbearance agreement.

Final points to consider before you make that call
It's likely that you are considering a settlement because your account is already in arrears. Therefore, your account has probably already been frozen, i.e. you can no longer use your card anymore. If it hasn't been, it almost certainly will be once you have informed the company about your financial difficulties.

You should also be aware that you might be required to pay tax on the amount the company waived. The IRS views "excused debt" as income and so expects you to pay tax on it. Anything written off above $600 will be reported and subject to tax accordingly.

The final point to consider is that a settlement will almost certainly hurt your credit score. The details of the settlement are likely to remain on your credit reports for seven years.

It is worth asking the company if they would be willing to report your agreement as "paid as agreed upon" or "paid in full," and not "settled." The former won't harm your credit score as much as the latter.

Get the agreement in writing
Finally, if the company agrees to a settlement, it is crucial that you get the terms in writing before you make any payments. A faxed or scanned letter stating that you have no future legal obligation for that debt is an absolute must.

Once you have the terms of your settlement agreement in writing, the company will be expecting you to make immediate payment. That's why it's never a good idea to agree to a settlement in principle unless you have the cash to honor it.

Dealing with credit card debt can be a daunting task. The good news, though, is that you can get out of it and begin getting your financial life back on the right track. Remember that a negotiated debt settlement is only one part of a sound debt management strategy. You should look at how you got into your current situation and take proactive steps going forward, such as lifestyle changes and reviewing your spending habits, to prevent it from happening again. You don't want to play credit card pinball, bouncing right back into trouble right after you've crawled out of it. Anyone can make one mistake. It's up to you to avoid repeating it!