Lower Your Debt With Credit Card Debt Settlement

Settling Your Own Credit Card Debt

Japanese man with eyeglasses siting on floor in the living room and using smart phone and laptop for managing home finances

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Paying off a large amount of credit card debt can be tough, even moreso if your balances are delinquent or have been charged off. Credit card debt settlement is a way of dealing with your credit card debt by paying less than you actually owe. While debt settlement ranks low on the list of desirable debt solutions, it's one you might consider if you're out of options and on the brink of filing bankruptcy.

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.

While people considering debt settlement may like the idea of having a company do all the work for you, debt settlement companies should generally be avoided. They collect your payments for months before making a settlement offer—if they make an offer at all. The point of collecting payments is 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

You pay in one of two ways—multiple payments over time or a single lump-sum payment. Creditors prefer a lump sum or very few payments (like 2-3) 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. To start your negotiations, offer an amount lower than what you're actually willing to pay. That way, you have some wiggle room if your creditor wants to negotiate up.

Negotiating a Settlement

Once you have a settlement offer in mind, call your credit card company and to talk to a manager, someone in a loss mitigation, or similar department. The customer service representatives you first speak with are usually not authorized to take debt settlement offers, will typically tell you no, even though they don't have the power to accept your offer. Always try to speak with someone with more authority in the company.

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 Watchouts

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 all together 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 cancelled debt, including debt that's been cancelled through credit card debt settlement. The bottom line, you owe the federal government more money which means 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 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.

Article Sources

  1. Internal Revenue Service. "Topic No. 431 Canceled Debt—Is It Taxable or Not?" Accessed Jan. 13, 2021.

  2. Consumer Financial Protection Bureau. "Need Help With Your Credit Card Debt? Start with Your Credit Card Company!" Accessed Jan. 13, 2021.