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Credit Card Debt Settlement

Credit card debt settlement offers a clean break from debt problems

Can you settle credit card debt yourself or do you need professional help?

When 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 is the basic step-by-step process try to negotiate a settlement on a single credit card debt:

  1. First, you must assess your budget and determine what you can afford to pay.
  2. Then you contact the creditor or collector with a settlement offer.
  3. They may accept the offer as-is or make a counteroffer
  4. Through negotiation, you reach an amount that satisfies both parties.
  5. You pay agreed settlement amount, typically as a single lump sum payment
  6. Once they receive the funds, they discharge the remaining balance

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.

It’s also worth noting that you can also go through this process with a debt settlement attorney. It’s the same basic process, but you get an expert on your side to negotiate on your behalf. This often delivers better results, since you have someone that’s experienced and adept and negotiating settlements.

To help make things easy, Debt.com provides two debt settlement letter templates. You can use them to help negotiate credit card debt settlement if you decide to do the work yourself.

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. In many cases, they may advise you to stop making payments so you can divert those funds into your monthly set aside.
  4. Once you generate enough funds, they approach one of your creditor to make a settlement offer.
  5. The creditor may counteroffer, in which case your settlement team negotiates to reach a final amount that all parties can accept.
  6. Once you reach a settlement, fees can be applied.
  7. 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!

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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.

5 Factors that Affect Debt Settlement Negotiation

Approved debt settlement offerYour success with credit card debt settlement depends on a range of factors. You can’t expect to offer every creditor a percentage of what you borrowed and reach a successful settlement every time. You may have successful negotiations with some of your accounts, but not others.

These are the ten factors that determine how successful you can be during a settlement negotiation for credit card debt:

1. Is the account still with the original creditor or is it with a third-party collector?

Third-party collectors buy charged off debt at a discount, so they are more willing to accept partial payments. They can still make a profit even if you pay only part of what you owe. By contrast, credit card companies want the full amount because they take a “loss” on whatever you don’t pay back.

This means collectors are more willing to accept settlement offers, in general. They are also usually willing to take a smaller percentage of what’s owed.

2. How close is the debt to the statute of limitations for collections in your state?

Every state sets a statute of limitations on debt collection for various types of debt. The statute in most states for credit card debt is 10 years; the clock starts from the date the account first became delinquent. Once the statute expires, the creditor or collector can continue attempts to collect. However, they can’t sue you in court or do things like wage garnishment to recoup their money. And if you tell them to stop contacting you, they must honor that request.

So, as a debt gets closer to its statute of limitations, it usually becomes easier to negotiate settlements.

3. What does your budget look like and do you have any discretionary expenses that you can cut?

If you can show that you don’t have the funds to pay a debt, then a settlement becomes more likely. Having a formal budget in place that defines where every dollar is going can be helpful. It shows that you’re really struggling to make ends meet. If you can prove you’re not just frivolously spending, creditors and collectors will be more likely to accept a settlement based on that finanical hardship.

Of course, this means that first, you must try cutting back discretionary expenses (your wants). If there’s anything in your budget that isn’t a necessity, then it needs to be cut. The more you can show that you simply don’t have the money to pay, the more successful you’ll be with settlement.

4. Do you have a good negotiator on your side?

It may not seem exactly fair, but the expertise of the person negotiating for you matters! Creditors and collectors are experts at negotiating these types of deals. That’s all the people you’re talking to do. So, it makes sense that you need at least some expertise on your side to be successful.

If you are a good negotiator, then there’s no reason you can’t negotiate single credit card settlements yourself. However, if you cringe at car dealerships and aren’t a fan of haggling, then you may need some help. In this case, working with a licensed attorney or settlement company is beneficial because it gives you a stronger voice at the negotiating table.

5. How many other debts do you have to settle?

Again, this may seem less than fair, but having a range of other charged-off debts can improve your chances. If a creditor or collector sees that you are in the process of settling several debts, they may be more willing to negotiate. The idea is that you have a limited amount of funds available to settle your debts. The creditors and collectors that settle first are more likely to get paid. This sense of urgency can lead a company to accept a settlement.

You’ll see this factor reflected in the debt settlement letter templates we provide above. The idea is that based on the total amount of debt you have and limited funds available. you may only be able to settle a few debts. This creates a sense of urgency in the audience, meaning they may be more willing to negotiate.

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.

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Do-It-Yourself Credit Card Debt Settlement Tips

If you decide to try to negotiate 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 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 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

How to negotiate debt settlement with credit card companies

If your debts are still with the original creditors, there’s good news and bad news. The bad news is that a credit card company will  often require higher settlement percentages than a debt collector. A debt collector buys debt at a discount, so they’re willing to accept a smaller percentage to settle. By contrast, creditors don’t want to take a loss. So, they’ll try to get as much money as possible during the settlement. This means you can expect to pay more to settle a debt that’s still with the original issuer.

The good news is that many major credit card companies have settlement programs in place for customers who can’t pay. This includes Bank of America, Citibank and JP Morgan Chase. These companies are often willing to accept credit card lump sum settlement offers. In many cases, they may even be willing to help you set up a short repayment plan. Capital One may also be willing to accept settlements, but most experts will tell you they make it more difficult.

In this case, you may want to start with a phone call. Simply call their customer service department and ask if this issuer is willing to work with you to set up a settlement plan. If they do, ask them to send you the information in writing. Just remember, negotiating with creditors is often a long game. You must be diligent and keep pushing until you get the outomce you want.

A quote from Howard Dvorkin on how persistence pays off in debt negotiation

Credit Card Debt Settlement Taxes and How to Avoid Them

When you settle 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 “cancelled debt.”  The IRS treats cancelled 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 cancelled debt. All you need to do is show the IRS that the debt was cancelled during a period of financial hardship.

How tax filings work for cancelled debt

When a debt is forgiven or cancelled 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!

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 are 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.

Avoiding Credit Card Settlement Scams

In 2010 the Federal Trade Commission delivered new regulations to improve consumer rights controls on the debt settlement industry. This included an advance-fee ban, which bars debt settlement companies from taking fees until they reach at least one settlement. This ban went into effect in 2011, meaning that no settlement company can charge upfront fees before performing some service.

However, this does not mean that all debt settlement services are on the up and up. There are still scammers that prey on people’s desperation, then take their money and run. With that in mind, you need to take steps to ensure you work with a reputable debt settlement service.

  • The company should be a member of an accredited debt settlement service association, such as the American Fair Credit Council.
  • They should not charge fees for your initial consultation and debt evaluation.
  • Any program setup or maintenance fees should only apply after they settle a debt for you.
  • If there are fees to set up your settlement program, the debt settlement company must offer a money-back guarantee.
  • Make sure to check independent third-party reviews, consumer reports and rip-off reports to see what people say about the company.

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.

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Article last modified on September 11, 2018. Published by Debt.com, LLC . Mobile users may also access the AMP Version: Credit Card Debt Settlement - AMP.