It is not uncommon to have a credit card balance that seems impossible to dig your way out of. Debt can be a crushing burden, and it doesn't help when credit card companies add fees and interest rates that make it even harder to be free of the debt. For some, the option of negotiating a settlement for credit card debt is the only viable option. It is wise to be prepared for what that process will entail before beginning so you can make the most informed decisions.
Step 1
Decide who will handle the debt settlement negotiations for your account. Research the available debt settlement companies, checking for fees for service, ratings by former customers and the length of time the firm has been in business. Consider the option of settling your debt without any outside help, which might require more effort but is possible and preferred by some.
Step 2
Allow the account to be overdue for 60 to 90 days, preferably before it goes to a collections agency. Give the company the opportunity to see that you don't have the resources to pay your balance in full and that it is in its best interest to settle for some of the money instead of none. If you are working with a settlement company, ignore any and all phone calls and letters received during this time period.
Step 3
Create a settlement account in the meantime. Act as if you are still making payments, but set the payments aside in a savings account to use upon settlement. Be prepared to have fees withdrawn from this account if you are using a debt settlement company.
Step 4
Start negotiations for a settlement on the account. Seek outside advice on what a reasonable settlement amount would be, as most accounts are settled for between 25 percent and 50 percent of the balance, depending on the company.
Step 5
Pay off the negotiated settlement amount. Make one lump-sum payment if possible. Be sure to get a letter from the credit card company that states the debt has been settled and you no longer owe.
Tips and Warnings
- Negotiating a settlement on a debt owed should be viewed as a last resort to avoid declaring bankruptcy. Discuss the option of settlement with a professional to obtain advice on whether this is the right option for you. Since debt settlement will have a negative impact on your credit score, consider taking steps to improve your score both before and after paying off the settlement.
- Sometimes credit card companies will refuse to settle if they feel you can pay the full amount. You are also at risk of having to go to court or having your wages garnished, depending on your assets and the state you in which you reside. If you are forgiven more than $600 in a settlement, credit card companies are required to report this amount to the IRS as taxable income, and you will receive a 1099 Form. Paying this is avoidable if you can show that you have a negative net worth for that year.
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