Credit cards can be a blessing when used properly. Sometimes, however, things happen that are out of our control and leave us unable to pay the debt owed to credit card companies. While many credit card companies may be willing to work with you in determining a different payment arrangement, this is not always enough. It is not uncommon to need to work out a settlement arrangement, wherein the debtor can pay less to the credit card company than is owed on the account.
Step 1
Determine who will handle the negotiations of the debt settlement process. Look into available debt settlement companies online or talk to friends who may have had to negotiate to determine the reliability of the different companies. Don't forget to research fees for service, some of which may be hidden, and the length of time that the company has been negotiating settlements as older companies may have relationships with credit card companies that will make negotiations easier. Consider the option of settling debt on your own, without any outside help, which may require some more effort but is possible and preferred by some.
Step 2
Refrain from making payments on the account for 60 to 90 days, which will be easy if you are already having difficulty in making the payments. Allow the credit card company to realize that you do not have the ability to pay the balance on your account in full, and that it is wisest for them to settle for a portion of the money. During this time period, it is recommended that all phone calls, letters and likewise go unanswered.
Step 3
Open a bank account during this time period in which to deposit money. Ideally, you will deposit the amount that you would regularly be making in payments. This money will be used to pay off the account upon settlement and, as such, you should accrue as much money as possible in this account. The more money you have, the greater the likelihood of being able to settle. If you are using a debt settlement company, the monthly amount deposited will be prearranged with them and fees will likely be withdrawn from this account during settlement.
Step 4
Begin the negotiation process with the credit card company. Preferably, this will take place before the account is sent to collections since the credit card can't negotiate with you after this time. If settling on your own, seek advice from a financial consultant to decipher what an appropriate settlement amount would be. Depending on the company, most accounts are settled for between 25 and 50 percent of the whole balance.
Step 5
Pay off the credit card account for the negotiated settlement amount. Often you will be expected to pay this amount in one lump-sum payment. Ask the credit card company to send you a letter that states that your debt has been settled and you no longer owe them any money.
Tips and Warnings
- Settling a debt will have a negative influence on your credit score, so be prepared to work on improving your score following the settlement. Talk to a professional about the option of settlement before beginning the process to determine if this is a proper financial decision for your personal situation. Negotiating a settlement on a debt owed should be viewed as a last resort to avoid declaring bankruptcy.
- If your credit card company believes that you can somehow pay the full amount, they may refuse to settle with you. Also, there is the risk of being summoned to court, having your wages garnished or similar consequences for not paying monthly payments. Check your state laws and policies to determine what may effect you. You will be taxed by the IRS on any forgiven amount over $600, but this tax can be avoided if your net worth for the year is negative.
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