Credit card debt is often not a large concern for people. Sometimes, however, credit card debt can become too much to repay, especially when fees and interest prevent monthly payments from making much of a difference. While there are various ways to address this, negotiating a debt settlement is a viable option for some. It is wise to be well informed of the settlement process before beginning negotiations so that 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, including fees for service, ratings by former customers and the length of time the firm has been in business. Consider the option of settling debt without any outside help, which may require some more effort but is possible and preferred by some.
Step 2
Allow the account to be overdue for 60 to 90 days, preferably, before going to a collections agency. Give the credit card 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 other debt relief phone calls, letters, and so on received during this time period.
Step 3
Create a settlement account in the meantime. Often a savings account or trust fund (set up with the settlement company) is a good option. Act as if you are still making payments, but set them 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 Be prepared to have fees withdrawn from this account if you are using a debt settlement company.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 and 50 percent of the balance, depending on the credit card 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 may 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 believe you can pay the full amount. You are also at risk of having to go to court or having your wages garnisheed, depending on your assets and the state you in which you reside. If you are forgiven more than $600 in 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.
Member Comments