Education Center

Credit Card Debt Settlement

Do you need professional help for credit card debt settlement or can you do it yourself?

Credit card debt settlement offers a clean break from debt problemsWhen you can’t afford to pay off everything you owe, credit card debt settlement can help you get out of debt fast. You pay back a percentage of what you owe and in return, the creditor discharges the remaining balance. This can hurt your credit score. However, as long as you are aware of the impact and have a plan to recover, settlement can be beneficial. It can provide the fast exit that you need to get a clean start without your existing debt weighing you down.

There are two basic paths to credit card debt settlement

Credit card debt settlement negotiation works in two basic ways:

  1. You can negotiate a settlement with a single creditor or collector.
  2. You can enroll in a debt settlement program to settle multiple debts.

The first path is something that you can either do on your own or work with a debt settlement attorney. It’s usually used when you have one problem account that’s gone to collections. To use the second option, you usually must go through a debt settlement company. This option is best used when you have multiple debts that are behind or already charged off.

Understanding the Credit Card Settlement Process

Option 1: How to negotiate credit card debt settlement yourself with a single creditor

This basic credit card debt settlement process can vary. In some cases, the collector or creditor may contact you with a settlement offer. Then you decide if you want to accept it or make a counteroffer. In some cases, you can make the settlement with a small series of payments, instead of a single lump sum; however, this is less common.

Learn more about credit card debt negotiation »

Option 2: How a credit card debt settlement program works

When you have multiple debts to settle, you generally set up a debt settlement program through a debt settlement negotiation company. Using a debt settlement program generally follows this same basic process for individual negotiations. However, there are steps you take before negotiation when you enroll in a program through a debt settlement company.

  1. The settlement company creates a “set aside” account where you deposit money to generate the funds you need.
  2. They help evaluate your budget to see how much money you have available to set aside each month; this amount is usually significantly less than the total monthly payment you’re making on all credit card debts.
  3. Once you generate enough funds, they approach one of your creditor to make a settlement offer.
  4. The creditor may counteroffer, in which case your settlement team negotiates to reach a final amount that all parties can accept.
  5. Once you reach a settlement, fees can be applied.
  6. This process repeats with each creditor or collector until you reach settlements on all the debts included in your program.

This type of debt settlement works for other unsecured debts!

Credit cards aren’t the only type of debt that you can settle using the methods described on this page. This type of settlement works for almost any unsecured debt:

  • Credit cards
  • In-store credit lines
  • Bills that have gone to collections
  • Payday loans
  • Unpaid medical debt collections

So, if you have more unsecured debts that just credit cards, you can roll them into the same settlement program. This gives you one solution to take care of a wider range of the debt challenges that you face.

Ready to get started? Let Debt.com match you with an accredited debt settlement company now, so you can get relief today!

Free Evaluation

It’s worth noting that there are also settlement programs for tax debt and private student loans. Settlement usually doesn’t work for most secured debts, like mortgages and auto loans. That’s because the lender can simply repossess the collateral (your home or car) if you don’t pay the debt.

Back to top

Pros and Cons of Debt Settlement on a Credit Card

Pros of Credit Card SettlementCons of Credit Card Settlement
It usually takes less time than other solutionsSettlement generates negative items on your credit report
You get out of debt for less than you owe (usually about 40-80% of the balance)These items also hurt your credit score
You’ll avoid getting sued in civil court and actions like wage garnishmentSettlement will always close your accounts; you may have trouble opening new ones
It stops the constant annoyance of collection callsYou could be on the hook for income taxes for the settled debt

Credit card settlement benefits by the numbers

In June 2014 the Center for Responsible Lending conducted a study to evaluate the impact of reputable debt settlement services following the implementation of new regulations by the Federal Trade Commission. Here is what they found…

  • The average client included 6 debts in their unsecured debt settlement program
  • Total debt enrolled in the program averaged out at $30,357
  • The average settlement percentage was 48%

When credit card debt settlement can be better than consolidation

If you have credit card debt to repay, you generally have two options:

  1. Credit card debt consolidation
  2. Debt settlement

Settlement is usually the better option when you simply want a fast exit and don’t care about credit score damage. It’s especially useful once your debts are already charged off. That typically happens after six months of nonpayment. The creditor freezes the account, moves it to charge-off status and counts it as a loss for the company. They either sell it to an outside debt collection agency or send it to their in-house collections department.

At this point, in either case, all interest charges and late fees on the account freeze. Federal law says that a creditor or collector cannot apply interest charges or additional late fees to a charged-off balance. They can only collect the amount listed when the account was charged off.

This means that there’s less benefit to consolidating the debt. The biggest advantage of credit card debt consolidation is to reduce or eliminate interest rate applied to each debt. If no new interest charges can be applied and rates don’t matter, then consolidation offers less of an advantage.

This means that once a debt goes to collections, settlement should be on the table as a possible solution. Consider carefully if you’re willing to accept some credit damage. If you are, then you should seriously consider settlement. If you want to avoid credit damage, then you should look at other options first.

Is credit card debt settlement the right choice? Use Debt.com’s settlement self-assessment test to decide!

Question 1

What’s the status of most of the accounts you want to settle?

a. Current

b. Delinquent (behind, but not charged off)

c. Charged off

d. Sold to a collector

Reveal Answer

Debts that have been sold to collectors are the easiest to settle. Charged off debts that are still with the original creditor are harder to settle, but still doable. Most creditors will not negotiate settlement if your account is current.

C or D are best for settlement

Return to question

Question 2

What is your credit score?

a. Excellent (FICO 750 or higher)

b. Good (FICO 700-749)

c. Fair (FICO 650-699)

d. Poor (FICO 550-649)

e. Bad (FICO below 550)

Reveal Answer

Debts that have been sold to collectors are the easiest to settle. Charged off debts that are still with the original creditor are harder to settle, but still doable. Most creditors will not negotiate settlement if your account is current.

D or E are best for settlement

Return to question

Question 3

How much debt do you have to pay off?

a. Less than $10,000

b. $10,000-$100,000

c. More than $100,000

Reveal Answer

Most settlement programs take debt ranges from $10,000 to $100,000. If you owe less than $10,000, you should try do-it-yourself debt settlement first. You should also consider other relief options. If you owe more than $100,000, you will need to find a settlement company that works in “high volume debt.”

B ($10K-$100K) is the ideal range for a settlement program

Return to question

Even if you owe more than $10,000, Debt.com can match you with an accredited debt settlement service to get the help you need.

Get Started
Back to top

Do-It-Yourself Credit Card Debt Settlement Tips

If you decide to try to negotiate a settlement on credit card debt yourself, use the following tips:

  1. Be realistic
    1. Use the average settlement amounts as a guide.
    2. Most people settle their debt for about 40% of what they owed.
    3. Original creditors may require higher settlements that collectors.
    4. If you want to set up a payment plan, make a budget and review it to see how much you can really afford.
  2. Get everything in writing
    1. Avoid phone conversations, since verbal agreements may not be honored later.
    2. Type settlement offers and counteroffers out and print them.
    3. Be concise – don’t give backstory about why you can’t pay.
    4. Include your name, address and any relevant account numbers at the top of the letter.
    5. If you have funds to do so, considering sending all correspondence certified mail, return receipt requested; this allows to you confirm when the company receives your letter.
    6. Save copies of your letters, as well as copies of any correspondence you receive.
  3. Ask for re-aging during the negotiation
    1. Creditors may agree to “re-age” your account.
    2. They report to the credit bureaus that your account is paid as agreed.
    3. This may remove negative items listed in your credit reports with each credit bureau.
    4. You can use a settlement offer and request re-aging in exchange
Back to top

Credit Card Debt Settlement Taxes and How to Avoid Them

When you settle a debt for less than the full amount that you owe, you could be subject to income taxes. Any principal that you do not pay back is considered “canceled debt.”  The IRS treats canceled debt as a source of income – it’s money you took in without paying your creditors back.  But that means that it is taxable.

The good news is that there is a way to avoid paying taxes on canceled debt. All you need to do is show the IRS that the debt was canceled during a period of financial hardship.

How tax filings work for canceled debt

When a debt is forgiven or canceled in a settlement, the creditor must complete a 1099-C. It will report your Cancellation of Debt Income (CODI). This happens for any debt settled that totals over $600. So, you don’t need to worry about this if the settled debt amount is less than $600.

In all other cases, you should receive a copy of the 1099-C from the creditor. They also send one to the IRS, which is why you can’t just ignore it. Instead, you need to apply for an exclusion. You can qualify for an exclusion if you can show that the debt was cancelled due to insolvency. In other words, you didn’t have the money to pay!

To qualify for an exclusion, you must complete IRS form 982. It’s worth noting that this is not exactly an easy, hassle-free form to fill out. It includes a title form called the Reduction of Tax Attributes Due to Discharge of Indebtedness that is fairly exhaustive. We recommend working with a certified tax preparer or resolution service to ensure this is done correctly. If you don’t qualify for the exclusion, then you can expect to pay taxes on the settled debt on your next income tax filing!

Back to top

Credit Card Debt Settlement and Credit Score Considerations

Q:
How does credit card debt settlement appear on your credit report?

1
500

A:

Each time you settle a credit card debt, it creates a negative item on your credit report. This item is reported for seven years from the date of final discharge. It may be possible during negotiation that you ask the creditor or collector to “re-age” your account following the settlement. They basically agree to update the information in your credit report to show as current in exchange for your payment.

This can remove the negative credit report information, so you’re not bogged down by settlements as you move forward.

Q:
How does a credit card settlement affect your credit score?

1
500

A:

Credit card settlements count as part of your credit history, which is the biggest factor used to calculate credit scores. Credit history counts toward 35% of the total weight in a credit score. So, negative information like settlements can have a significant impact on a consumer’s credit score.

On the other hand, the size of the impact depends on where you start. If you have excellent credit with no prior negative information, then a settlement would have a notable impact. However, if you have bad credit already caused by a number of other negative items, the impact may be less.

Back to top

Debt.com only works with AFCC-accredited debt settlement companies. If you need help, let us connect you with the right service for your needs.

Get Help Now

Article last modified on February 14, 2019. Published by Debt.com, LLC . Mobile users may also access the AMP Version: Credit Card Debt Settlement - AMP.