How to Settle Credit Card Debt
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Settling credit card debt is a potential option when you have many missed payments over several months. If a credit card issuer or collection agency suspects they won't get paid at all, they might be willing to accept less money than you owe. It’s typically a last resort to be explored after you’ve considered other debt-payoff options.
“Whether or not you can settle depends on each creditor; no two banks have the same collection process or settling parameters,” says Leslie Tayne, founder and managing director at Tayne Law Group. “The outcome can depend on many factors, including the creditor's policies, the debt amount, the individual's credit history, and the ability to negotiate effectively.”
Here’s what you need to know about how to settle credit card debt.
Note that settling credit card debt is different from — and riskier than — simply negotiating the cost of existing debt, such as attempting to get fees waived or APRs lowered.
Pathways for credit card debt settlement
There are different options for settling the debt on your credit cards. You can try the do-it-yourself method or have an attorney or company settle debt on your behalf. Regardless, there is no guarantee that the company that owns the debt will be willing to settle. Be wary of anyone offering debt settlement services who promises these results. Many people in their desperation to settle debt are left vulnerable to scams by debt relief companies or other sources. Before hiring anyone to settle debt on your behalf, research their background, history and track record.
Do it yourself
When deciding whether to settle debt on your own or hire someone to negotiate on your behalf, it’s worth considering the pros and cons for both. Hiring someone can cost more, but settling debt on your own can be a risk. The law can come into play, and if you don’t know what to look for, you could dig yourself deeper into debt and spend more money down the line to fix those mistakes. Consider your options and what is best for your situation.
Hire an attorney experienced with debt settlements
An attorney who specializes in debt settlement can help you consider factors like federal and state laws, statutes of limitations for debt, time-barred debts, whether you’re judgment-proof or have a lien due to other debts, credit reporting, and tax outcomes, among other things. They may also understand how certain creditors or collections agencies work and the kind of offers they are willing to accept.
It can be difficult to wrap your head around attorney costs when you’re already struggling to meet payments. It might be possible to find an attorney who offers reduced costs through a legal aid office, but they can be in high demand. Costs for a private attorney may vary based on the type of work involved. They may charge a flat fee per creditor, a percentage of the debt eliminated, or an hourly rate. Attorneys are in theory held to ethical standards, but some have been known to not charge fairly. When hiring an attorney, it's in your best interest to do an online search for consumer reviews, consumer complaints, actions taken by the Consumer Financial Protection Bureau (CFPB), and the attorney's standing with the state bar.
Hire a debt relief company
A debt settlement or relief company is an option, but it can come with risks and steep costs. These companies generally charge excessive fees and rarely deliver on the promised results, leaving you worse off financially, according to the CFPB’s website. You’re typically required to stop paying your balances and instead put that money into a savings account. As a result, you’ll incur late fees, penalty interest rates and potentially other charges. Pricey service fees may also apply for the debt and the savings account, which can be counterproductive if those costs cancel out the value of any balances settled. Some creditors may also refuse to work with certain debt relief companies.
If you choose to work with a debt settlement company, the CFPB’s website suggests contacting your state attorney general or a local consumer protection agency to see whether the company has any consumer complaints on file. Some states also require debt settlement companies to be licensed. You can verify if a company is licensed through your state’s regulator or attorney general.
How to determine if settlement is right for you
If your credit has already taken a hit because of missed payments for six months or longer, debt settlement is an option to consider, according to Tayne, but it’s not without drawbacks. Beyond the credit repercussions of missed payments, this option can leave a lasting mark.
“On a credit report, a settled account is identified as being ‘settled for less than the full balance,’” said Margaret Poe, head of consumer credit education at TransUnion credit bureau, in an email. “The settled account will remain on a credit report for seven years from the date of first delinquency, as with other derogatory remarks on a credit report.”
Even if you are able to settle debt, the journey toward that agreement may be packed with pitfalls. You should prepare to receive calls from your creditor or a debt collector as payments become past due. The costs will also keep spiraling as interest and fees continue to accrue. And, as you’re missing payments, it’s possible to get sued by the creditor or collection agency.
It’s a big risk to take when there’s no guarantee that you can settle debt.
How to negotiate a credit card debt settlement yourself
Negotiating a credit card debt settlement isn’t a one-size-fits-all approach, so the following steps may not work for everyone, and they don't factor in other possible debts. You'll need certain financial resources to settle debt. If you’re having trouble covering essentials like housing and food, consider bankruptcy as a potential option.
1. Consult an expert
Before trying to negotiate yourself, it may be in your best interest to consult an expert early in the process. An expert may alert you to blind spots. You don’t have to hire an expert or a company for the long term if the costs are overwhelming, but at the very least you can understand if you should go at it alone or consider other options like a debt management program.
You can get an initial consultation with an attorney or a certified credit counselor. The latter will be more affordable, but credit counselors aren't very involved in the settlement process. What they can help with is exploring your options and helping you gain an understanding of whether a do-it-yourself approach is a good idea.
“We can obviously help with the budgeting process and thinking about, you know, other possible ramifications,” says Thomas Nitzsche, senior director of media and brand at Money Management International, a nonprofit credit counseling agency. “If a debt management program is not viable, the counselor is going to tell you that you really need to seek legal advice.”
An attorney will be more familiar with the settlement process. Unless you hire an attorney to represent you, though, that person can only offer general advice that may not be specific to your situation. Regardless, both experts are skilled at negotiating credit card debt, so it’s wise to at least consult one.
2. Figure out whom and how much you owe
Understanding who owns your debt is crucial. You can get some of that information in your free credit report from annualcreditreport.com, according to Tayne. But the report may not account for all of your debt in some cases. Judgments or liens don’t always show up on a credit report. You can go to your county recorder’s office to get information about potential judgments or liens and use online directories to find statutes of limitations by state, she says.
These are the kinds of steps an expert can potentially help you plan or consider before starting the settlement process on your own, hence why we recommend the consultation step above first.
3. Know your budget
By giving your finances an in-depth look, you can see how much money is truly available to negotiate a settlement. Review your budget and statements to explore the possibility of eliminating unnecessary purchases like lapsed free trials or others. Also look for opportunities to swap products or services for less costly alternatives.
In your review, you’ll also need to assess the highest and lowest amount you can afford to pay in a settlement. Consider whether it's best to negotiate several payments or a lump sum.
The range should allow you to still prioritize essentials like rent, utilities, transportation, gas, food and anything else you may need. Ideally, you can negotiate for an amount that gives your budget room to breathe. Leave a buffer for potential emergencies and tax-related costs that may apply on debts forgiven over $600. Depending on your circumstances, it may be possible to get the tax costs waived, Tayne says.
» MORE: Free budget planner worksheet
4. Get organized
Once you know who owns your debt, look up contact numbers for those companies and write them down. You should also make a list of the debts, the amounts outstanding, and the range you can afford to pay back.
Here are some of the documents you may need:
Your budget and range for settlement.
Your credit report.
Documents concerning judgments or liens.
A script of what you’re planning to say.
A list of questions if a settlement agreement is proposed.
Practicing what you’re going to say will also help you be more confident in the actual negotiation process. Don’t step outside the parameters of what you can afford, and don’t negotiate out of fear — even if the person on the other end of the call seems intimidating.
In case you are able to get a settlement agreement, it helps to have a list of follow-up questions. For instance, you may want clarity on the following:
When, if at all, can you get the agreement in writing?
How will the settled debt appear on your credit report?
What happens if you don’t honor the terms of the agreement?
Will you be taxed on the amount settled?
Will you get a 1099-C for the settlement, and if so, when?
5. Make the call
Once you’ve done your prep work, you’re ready to make the call to the creditor or debt collection company. Before dialing, here are some best practices to consider:
To prevent unwanted surprises, don't provide your bank account information upfront to the company that owns the debt. Wait until you have a signed agreement.
Write down the names of people you speak to and the time you spoke to them.
Write down the numbers of departments before accepting a transferred call.
Make as many calls as it takes to get through to the right person.
Start negotiations at the lowest offer possible (i.e., even if you can afford to pay 60%, start at 20%).
Once you’re ready to dial, ask to speak with an employee who can negotiate your debt. Start by asking, “I would like to settle my outstanding credit card debt. Can we discuss any options that you offer?” If you're asked why you can’t pay it off, avoid revealing too much information, to prevent it from potentially being used against you in the settlement process.
“What consumers tend to do is just dump on the creditor tons of information that impacts and impedes the settlement process,” Tayne says. “Somebody who is an attorney understands how to filter certain information in order to appropriately negotiate in the client’s best interest.”
Once you share that you’re struggling to meet payments, the account may be closed if it’s still with the original creditor.
Don’t be afraid to ask for more time to think about a settlement offer. Ask for the direct number so that you can pick up where you left off. Don’t agree to any terms or offers that are unclear or out of budget. Ask for clarification or a breakdown of costs, if needed.
6. Get the agreement in writing
Request the agreement in writing and carefully review it before signing to ensure it includes the terms you agreed to. You might be under the impression that you’ve settled debt, but it may not be the case until you get all of the necessary details in writing.
The agreement should include the name and number of the account settled, the name of the creditor, the date, and the terms depending on whether you’ll have different payment deadlines or make a lump-sum payment, according to Tayne. You can also feel free to request that credit reporting details be included and anything else that might be relevant or useful to document.
Don’t make any payments or share any bank account details until the agreement is finalized.
7. Honor the settlement agreement
It’s important to meet the terms of the new agreement. Failure to do so can result in a lawsuit and fewer opportunities to negotiate in the future, Tayne says. To avoid further complications, be sure to pay off any tax-related costs that result from the debt settled.
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