Credit Card Debt Settlement

Credit card debt settlement is when you submit a lump-sum payment for the majority of what you owe in return for the company that owns the debt forgiving part of the outstanding balance as well as certain fees and finance charges. A debt settlement agreement is one way to escape serious credit card debt.

A settlement is neither the only viable credit card debt solution, nor without its own perils, however. A lot of shady companies operate in the debt settlement space, and both debt settlement and the circumstances that bring it about can be detrimental to your credit standing.

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How Does Credit Card Debt Settlement Work?

There are two basic types of credit card debt settlement: do-it-yourself debt settlement and service-assisted debt settlement. The fundamentals, however, are the same regardless of which type of debt settlement program you choose or what type of debt you’re trying to settle.

In either case, credit card debt settlement is only a viable option if you have already defaulted on your balance or are close to doing so (i.e. you’re experiencing serious long-term financial hardship). In other words, you have to be around 180 days behind on your credit card payments. Otherwise, you won’t even qualify for consideration.

If you qualify for credit card debt settlement, here’s how the process generally works:

1. You make a partial payment offer to your credit card issuer or the debt collection agency your debt has been sold to. This can be anywhere from 30-80% of the full amount owed. Ask to pay that lump sum and have the remaining amount forgiven.
2. The creditor can accept, reject, or counter this offer.
3. Once both parties agree on a settlement amount, you will be required to submit the respective lump-sum payment within a specified timeframe.

Paying the settlement amount on time will satisfy and officially close the credit card account in question. Not doing so will likely increase the odds of the issuer suing for the full amount owed.

Debt Settlement Pros & Cons

There are both advantages and disadvantages to settling credit card debt. The pros include saving money, avoiding lawsuits and getting your finances back on track, while the cons include no guarantee of success, credit score damage, and the potential for expensive fees.

Credit Card Debt Settlement Pros

• You can save money. Paying part of what you owe is obviously better than paying 100% of what you owe. In some cases, you may even be able to get the majority of your debt forgiven.
• You avoid worst-case scenarios. By settling your credit card debt, you avoid the possibility that the company will sue you and potentially garnish your wages or bank account. You can also avoid bankruptcy, which would be absolutely disastrous for your credit.
• It helps you get back on track. Once you make the lump-sum settlement payment, you’re no longer in default on your credit card debt and no longer have the balance hanging over your head. That helps you get back on track with your finances overall, which in turn can eventually raise your credit score.
• It can be free. Debt settlement companies charge fees for their services, but you can try settling your own credit card debt by yourself for free. You can also sometimes receive free services from nonprofit organizations.

Credit Card Debt Settlement Cons

• It’s not guaranteed to work. Your credit card issuer or debt collection agency doesn’t have to accept a settlement. Many will because they want a guarantee of at least some money, but it’s possible that your settlement attempt could fail.
• You must have already defaulted. The company likely won’t even consider settling your debt unless you’ve defaulted, meaning you’re at least 180 days late on payments. That means your credit score will already have taken a huge hit from many months of nonpayment. If you’re late but not in default, you’ll likely have to continue damaging your credit score until you reach default in order to settle.
• There can be expensive fees. For-profit credit card debt settlement companies will charge you costly fees in return for their services, and they’re not even guaranteed to get you a good deal. In fact, the fee for a debt settlement company ranges from 15% to 25% of the total debt, with an average of 16.8%, according to the American Association for Debt Resolution.
• You’ll owe taxes. The principal amount of any debt that you’re forgiven actually counts as income for the purposes of taxation. The means that you could get a nasty surprise come tax season.

Ultimately, it’s up to you to determine whether the advantages of credit card debt settlement outweigh the disadvantages in your case.

Ways to Settle Credit Card Debt

• DIY Debt Settlement: Once your account is in default, you can call up your credit card issuer or debt collection agency (whichever currently holds your debt) and ask to negotiate. Once you come to an agreement with the company’s representative, ask to get it in writing and then make sure to keep up your end of the bargain.
• Debt Settlement Company: There are plenty of companies who will negotiate with creditors on your behalf – for a fee. While they come up with a plan, they’ll typically have you set aside money each month for a settlement while continuing to not pay your monthly credit card payments. Using a debt settlement company is rarely worth the cost of its services.
• Nonprofit Organizations: You may be able to find a nonprofit that will help you negotiate a credit card debt settlement for free. This allows you to receive the benefit of expertise at no cost. Just make sure the organization is truly a nonprofit and not a sketchy debt settlement company with hidden fees at the end.

How to Negotiate a Credit Card Debt Settlement Yourself

Settling credit card debt yourself is certainly possible, but it’s not something you can do without a solid plan. Thankfully, the steps for DIY debt settlement aren’t too difficult.

1. Make sure your account is in default. If you’re not at least 180 days late on your credit card payments, your chances of actually having a debt settlement offer accepted are very slim.
2. Figure out what you can afford to pay. Take a look at your finances and figure out how much of a lump sum you’re able to pay right now without stopping yourself from being able to afford your basic needs. Come up with a maximum you’re able to pay and a minimum you will offer first during negotiations.
3. Call your card’s issuer or debt collection company. Contact the company who currently holds your debt, whether that’s still the credit card issuer or a debt collection agency they’ve sold the debt to. Tell them you want to negotiate a debt settlement.
4. Make your lowest offer. Offer the minimum amount you’re willing to pay in a lump sum. This should be at least 30% of what you owe. If the company accepts that offer, great! If not, they’ll likely counter with a higher amount.
5. Negotiate. Discuss the situation with a company representative until you come to an agreement on the percentage you’ll pay. Do your best to not exceed the maximum you came up with during planning, and make it clear that anything beyond this maximum will make it difficult for you to afford basic needs.
6. Get an agreement in writing. Once you’ve agreed on a settlement amount, ask the company to send you the contract in writing. This will ensure there’s a record of the agreement and that it will hold up in court.
7. Pay what you owe. Make your lump sum payment by the specified due date. Your credit card account will then typically be closed (if it hasn’t been already) and you will no longer owe any debt to the company.

You can learn more about do-it-yourself debt settlement here on WalletHub.

Hiring a Credit Card Debt Settlement Company

A wide range of companies can help you settle credit card debt, and their legitimacy ranges just as far.

Attorneys

Many attorneys specialize in debt settlement and offer free consultations. However, they will charge for their services unless you can find one who does pro bono work.

An advantage of hiring a lawyer is that they know the law and can make sure your credit card issuer or debt collection company is not doing anything illegal in the pursuit of your debt. Lawyers are also good at negotiating and know how to prevent a lawsuit against you – or defend you from one.

The downside is the cost, and also the fact that sometimes “debt settlement attorneys” are really just for-profit debt settlement companies in disguise.

Nonprofits

Certain nonprofits handle credit card debt settlements. While you might assume such debt settlement professionals to be effective and trustworthy (and they often are), that’s certainly not a foregone conclusion. Some may still charge for their services after an initial free consultation.

In addition, even if a nonprofit organization offering debt settlement programs helps you for free, that still doesn’t guarantee you’ll actually get results and have a settlement accepted. Plus, your credit can still continue to get damaged during the negotiation process.

For-Profit Debt Settlement Companies

Consumers must be even more diligent when dealing with a for-profit credit card debt settlement company or credit “repair” service (the ones that typically advertise the most). A good portion of these companies are known to be scams, and even those that are considered somewhat reputable won’t be able to do anything for you until you’ve defaulted.

Many debt settlement services will charge hefty fees for their attractive promises, only to sit on the payment you give them until your credit is ruined, before even beginning negotiations with your creditor – if they ever actually do so. It’s therefore usually best to avoid debt settlement companies entirely. That said, it’s still worth weighing the pros and cons before deciding either way.

Advantages of Hiring a Debt Settlement Company

• A debt settlement company is likely to know which credit card issuers or debt collection agencies are more inclined to settle and how much they’ll accept.
• A debt settlement program helps you stay disciplined because it requires you to set aside money every month for an eventual payment on your debt, which you can use as leverage when negotiating. Remember that no creditor will want to make a deal with you unless you are ready to make a lump-sum payment.

Disadvantages of Hiring a Debt Settlement Company

• Hiring a debt settlement company will cost you a lot of money.
• Many debt settlement companies are known to be scams and do not have your best interest at heart.

If you do ultimately decide to hire a debt settlement company, this is roughly how things will work:

1. You make payments both to the debt settlement agency and into an independently managed savings account. The payments to the debt settlement agency cover their fees and are typically non-refundable. The money from the savings account is used to negotiate with your credit card company or collection agency.
2. Debt settlement companies typically charge 10-15% of the amount of credit card debt that you are trying to settle for their services. So, if you are trying to settle $10,000, for example, the fee to the debt settlement company will be between $1,000 and $1,500. You should definitely get quotes from multiple agencies as well as verify their policies and fee structures prior to making a final decision.
3. Before you enroll in a debt settlement program, the company will need to disclose how long settlement will take, what fees it will charge, the impact on your credit, and more.

When Is Settling Credit Card Debt a Good Idea?

Settling your credit card debt can be a wise decision for two main reasons:

• It eliminates the threat of a lawsuit, which might force you to pay your full balance. It can also prevent bankruptcy.
• Paying what you owe is simply the honest thing to do.

That said, every situation is different, and you must carefully evaluate the specifics of your own in order to make an informed decision regarding debt settlement. If you ultimately decide to settle your credit card debt, note that much like an attorney representing you in a legal matter, there are no guaranteed results in a debt settlement program. You are likely to default and do a lot of damage to your credit score before things get better, though.

Key Things to Remember

If you take nothing else from this article, it’s important for you to remember four things:

1. Credit card debt settlement is an amended payment agreement that entails submitting a one-time payment for part of what you owe in return for the credit card issuer/debt collector forgiving the rest.
2. Your account must be in default (or close to it) in order for you to qualify for debt settlement.
3. Avoid debt settlement companies and either do it yourself or work with a reputable non-profit. If you choose to pursue a DIY debt settlement, make sure you’re properly prepared and follow our tips for achieving a positive result.
4. Forgiven debt is taxable as income. This applies to the principal balance, not fees and interest.

Credit Card Debt Settlement FAQ (30 questions)

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