Using a credit card debt settlement plan is one of the wrong ways of paying off debts but it might be your only option. Credit card debt settlement is a way of dealing with your credit card debt by paying less than you actually owe. It is actually better than filing bankruptcy. This is how it works.
How Credit Card Debt Settlement Works
There are two methods of settling your credit card debt: by using a debt settlement company or on your own.
Using a settlement company might sound appealing but it’s not the best option. It’s true the company will do all the work for you but they need to collect your payments for months before making a settlement offer – if they make an offer at all. Collection of payments over a period of time helps to build up enough money to make a settlement offer that you can pay in full right away. Unfortunately, while your payments are accumulating, you’ll continue receiving collection calls and negative payment updates on your credit report.
In nearly every case, you’ll get better and faster results settling debts on your own.
How Much Should You Settle Your Debt?
Before you can settle your credit card debt, you have to decide how much you can pay. You may be able to settle your debts for 10% to 60% of the outstanding balance, depending on the creditor and age of the debt. Generally speaking, the more delinquent your account and the older the delinquency, the lower the amount creditors are willing to accept to satisfy the debt, but this isn’t always the case.
Lump-Sum vs. Multiple Payments
Two options of payment include – multiple payments over time or a single lump-sum payment. Creditors prefer a lump sum or very few payments and are less likely to agree to a settlement that has to be repaid over several months. Figure out how much of the debt you can pay immediately and offer that amount first.
Negotiating a Settlement
You can visit the credit card company and discuss a settlement offer with someone in charge. You can also place a call to initiate the negotiation.
During the call, make sure you write down the name, phone number, and extension of the person you talk to. Also, record the date and time of the call and the outcome. Don’t give up with a single phone call. You may get different and often conflicting answers from different people at the same creditor and sometimes even the same person on different days.
Credit Card Debt Settlement – Things To Look Out For
If your credit card is still open, your credit card company will likely close your credit card after settling your debt. You could also have your credit limit reduced or eliminated altogether once the creditor realizes you don’t plan to pay the balance in full.
Credit card debt settlement typically requires you to be a few months behind on your credit card payments. At that point in time, your credit score will take a severe hit. The effect will be worse if you’re late on more than one credit card.
The federal government requires you to pay taxes on canceled debt, including debt that’s been canceled through credit card debt settlement. This means you owe the federal government more money so you’ll get a smaller refund check or owe more money to the IRS.
Finalizing Your Settlement Offer
The final settlement agreement should be in writing. Either draft an agreement of your own or have your credit card company send you an agreement on company letterhead. Make sure you and someone from your credit card company have both signed the agreement before you send payment.
Once you make a payment, your credit report will be updated to show that you settled the debt and there’s no longer a balance on the account. Most settlements will fall off your credit report seven years from the date of the delinquency on the account.