The Basics Of Debt Settlement
Debt settlement involves negotiating with creditors to significantly reduce the amount of money you owe. Unlike the less dramatic forms of achieving debt relief, like debt consolidation or a debt management plan, with debt settlement, you repay only a portion of the principal you owe.
Lets say, for instance, that youre overdue on $5,000 you owe to one credit card issuer and $5,000 you owe to another credit card issuer. In order to get at least some of their money, the card issuers then decide to accept a lump-sum payment representing 50% of what you owe. So, instead of possibly not getting a penny from you, each creditor receives a lump-sum payment of $2,500.
What Happens When Your Credit Card Company Sends The Debt To A Collection Agency
Most companies will pursue collection using their in-house collection department for a few months. However, after several months they will write off your account as uncollectible and hire a collection agency to pursue payment. The collection agency may get paid a commission or may buy the debt for pennies on the dollar.
Before a debt collector can contact you, they must send a private letter by mail or email outlining how much you owe, who the original creditor was, and the name and contact information of the collection agency and collector demanding payment.
Once this letter is sent, you can expect calls to begin.
Debt collectors often use aggressive tactics to get you to honour your payments, like calling you repeatedly, contacting your relatives, and calling at inconvenient hours.
If you’re receiving multiple calls on credit card debts you can’t afford to pay and would like to consider some debt relief options, contact us.
It is important to know your rights and understand what a collection agency can and cant do. For example:
Unless you have committed fraud, you cant be sent to jail for unpaid credit card debt.
Always ensure you are talking with a legitimate collection agency which is why you should request written documentation before providing any personal financial information, negotiating any terms, or making any payments.
Call Your Credit Card Company
Consumers can use a settlement company , or they can do it on their own, says Linda Jacob, a financial counselor with Consumer Credit of Des Moines. Theres no need to pay a company to settle for you. Save the fees and do the work yourself.
If youve decided to negotiate on your own behalf after weighing your options, its time to call your credit card company. First, ask for the department that handles debt settlements or collections. You may want to prepare a script beforehand, so that you know exactly how to frame your request.
Clearly and politely explain your financial situation and ask for exactly what you want. The initial answer may be no, but that doesnt mean you cant be persistent even if it takes multiple phone calls.
Document every conversation you have. Write down the names and job titles of anyone you speak to so you can reference them in follow-up calls if necessary.
You cant be afraid to ask for a supervisor or the supervisors supervisor, Sullivan says. The higher you go, the more likely you are to find someone who is willing to make a concession.
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What Does The Credit Card Debt Relief Act Of 2010 Imply For You
The Federal Trade Commission passed this law to scrutinize debt settlement companies and protect consumers from unscrupulous players.
Here’s what that means to you:
- Debt negotiators must tell you how much to save before initiating the credit card settlement process. In other words, you must have the money you will need to settle.
- They must clearly explain the terms and conditions of the credit card debt settlement program you are considering.
- They need to indicate how long it will take to get results.
- If debt negotiators ask you to stop making payments on your debt, they need to explain the consequences of doing so.
- They can’t ask you to pay an upfront fee for giving credit card debt settlement advice.
- They can only charge a part of the total fee for every account they settle.
- They will set aside your funds in a trust account, of which you will be the sole owner. You will be entitled to all the interest earned in that account as well.
- The FDIC-insured bank that offers the trust account must not be affiliated with the debt relief company. In other words, they cannot self-deal with your money.
Debt Settlement Vs Bankruptcy
When the process works as intended, debt settlement can benefit everyone involved. Consumers get out of debt and save money, debt settlement firms earn money for providing a valuable service, and creditors receive more than they would if the consumer stopped paying altogether or entered chapter 7 bankruptcy. Chapter 7 bankruptcy involves liquidating the debtors non-exempt assets and using the proceeds to repay creditors. Exempt assets vary by state but often include household and personal possessions, a certain amount of home equity, retirement accounts, and a vehicle.
Compared to debt settlement, Detweiler says, if a consumer is eligible for chapter 7 bankruptcy, it may be a faster option. It is a legal process that can stop collection calls and lawsuits. Debt settlement doesn’t offer those guarantees. Still, he adds, there may be a variety of reasons why chapter 7 may not be a good option. A consumer may have to surrender property they may feel they need to keep. Or they may not want their financial troubles to be a matter of public record. Consumers could also find their employment options limited if they declare bankruptcy, as some professions evaluate workers credit histories.
Chapter 7 bankruptcy can be over and done after three to six months, versus years for debt settlement. It can be less stressful and may allow your credit score to recover faster, though bankruptcy will remain on your credit report for 10 years.
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If Your Payment Is More Than 4 Months Late
As you continue to miss credit card payments, these will be added to your credit report. Your account will be marked as R3 for 2 months late, R4 for 3 months late etc., up to R5.
Your creditor has the right to close your account, which means you no longer have access to this credit card to make purchases. Closed accounts on your report will also increase your utilization rate, which will lower your credit score.
If you miss a payment by more than 120 days, your creditor may label your account as a charge-off. A charge-off means your creditor has written off the account as a bad debt. At this time, your account will be marked as an R9. Accounts in collection or in charge-off severely harm your score and are an indication to future lenders that you may not be a good credit risk.
If you have accounts this far in arrears, you may find it difficult to obtain new credit.
At this stage, your creditor may also transfer or sell the debt to a collection agency.
What Debt Settlement Companies Dont Want You To Know
In the early 2000s, this country witnessed an explosion in the growth of the debt settlement industry, along with a growth in complaints against it. Promising ultra-low pay-offs and preying on consumers fears and their distaste for big credit card companies, debt settlement companies rarely discuss or make clear the high probability of several very negative consequences of their work with debtors.
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Best For Debt Settlement: Accredited Debt Relief
Accredited Debt Relief is the best settlement option based on its proven results and success on this type of debt relief with high-interest credit card debt over $10,000.
Receive a free consultation from a Certified Debt Specialist
Settle your debts for as little as 50%
Plans designed for at least $10,000 of debt
Lack of transparency in terms of pricing
Accredited Debt Relief has been in business since 2011 with the main goal of providing debt relief options to families who need them. This company boasts an array of results on its website, with plenty of former customers settling their debts for as little as 30% of what they originally owed. Accredited Debt Relief is accredited by the AFCC.
Like other debt relief companies, Accredited Debt Relief focuses its efforts on debt settlement. It starts potential clients with a free consultation with a certified debt specialist who can help them talk over their situation and options. If they are deemed a good candidate for debt settlement, Accredited Debt Relief helps them begin saving money in a separate account and stop using credit cards.
From there, the firm negotiates with creditors on your behalf, which can lead to a debt settlement that is considerably less than the amounts owed. Accredited Debt Relief also offers a money-back guarantee that lets you cancel your program at any time without a penalty.
Who Should I Talk To At The Credit Card Company
Who you talk to depends on what you want to negotiate.
Change payment date. If you just need a change in the regular payment date , you can probably talk to anyone in customer service.
Interest rate reduction. Asking for an interest rate reduction might require a manager to get involved.
Your payment will be late. Many companies have a specific department that you’ll be transferred to if you’re calling because you anticipate that a particular payment will be a few days late. You might even be able to have the late fee waived if you call in advance on this.
Negotiating settlements or long-term payment plans. If you’re calling for a more serious problem, the customer service department probably won’t be able to help you, even if it says it can. Be polite and talk with the representative, but if, in the end, the representative says no to your request, ask if you can speak to another department, or ask for a supervisor. You might need to go through more than one level before you reach someone with authority to negotiate.
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Some Real Examples Of What Debt Negotiators Can Do For You
Debt.com works with a network of debt relief providers, including the two types of professional debt negotiators that we described. So, lets look at two examples of real people that worked with a professional debt negotiation team. Both people had similar amounts of debt, but different needs and goals.
How Debt Settlement Affects Your Credit Score
Credit scores are generated by the information found in your credit report. When the credit reporting bureaus review your credit report, an account with an account condition of “Settled” may be seen as a negative. A settled account may be seen as proof that you were unable to pay your balance in full. New lenders may look into your full credit report to understand how likely you are to repay any balance they lend to you, so a “Settled” account shows that you were unable to completely repay a balance in the past.
For this reason, while a debt settlement can reduce what you owe and prevent you from using the credit card , you should expect to see a credit score drop when a debt settlement is officially made. This record of your debt settlement will remain on your credit report for seven years, which can also affect your ability to be approved for loans or new credit lines, and could even be seen as a negative when you apply for a rental home.
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Tips For Making Settlement Offers
- Always keep the age of the collection account and the statute of limitations in mind when making an offer. Remember that the older a debt is, the less it will take to settle.
- If a debt is still with the original creditor, realize that it will most likely take a higher percentage of what you owe to settle the debt.
- Always handle all negotiation in writing! Dont try to make settlement agreements over the phone.
- During debt negotiation, be aware that acknowledging that you owe a debt can reset the clock on the statute of limitations. This is another reason why you may not want to negotiate on older debts.
- Take note of the date of final discharge of the remaining balance. You need to know this, so you can ensure settlement notations on your credit report are removed after seven years.
Now Youre Ready To Call Your Credit Card Companies To Negotiate
Now youre armed with all the information you need to make an effective case. Have all this information written out and on hand when you start contacting your credit card companies. Then take these steps:
If a credit card company is still unwilling to budge, then it may be time to consider some alternative relief options.
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What Happens If You Cant Pay Your Credit Card Debt In Canada
The reality is creditors expect regular recurring payments and will pursue all options to collect when you are unable to pay when you owe money. Ignoring the bills means you risk phone calls from a debt collector, lowering your credit score, and other potential impacts.
Beyond the stress of knowing you owe money, the consequences of unpaid credit card debts, vary depends on the situation and the credit card issuer. I am Scott Schaefer, a Trustee with Hoyes Michalos and Associates. Some of the possible outcomes are you will be charged a late payment fee, youll be charged interest, you could have details reported on your credit report of the late payment. The longer it remains outstanding, the more significant hit it will be on your credit report and the worse your score can become. Your interest rates could get increased.
But here are some of the more extreme outcomes: you will have debt collectors calling you the account could be written off your credit report which really significantly reduces your score. There could be court action. You could have your wages garnished or your bank account seized. But keep in mind that these circumstances are usually done over time. Time makes a difference. So the longer things are, the worse it will be. Late payments can be reported on your credit report for up to six years.
The longer the outstanding debts remain unpaid, the more severe the actions your creditor will take to collect.
Myth No : Anyone Can Get Their Credit Card Balance Cut In Half For Any Reason
The truth: Legitimate debt settlement companies qualify clients, including asking for details about their hardship, says Tom Gordon, CEO of Clear One Advantage, a debt settlement company.
Debt settlement is for consumers experiencing hardships such as a loss of a job or pay cut, a divorce, medical problems or, in some cases, debt that has simply spiraled out of control. Maybe theyre borrowing from one credit card to pay the balance on another, Gordon says.
Lenders want to make sure a consumer is having legitimate financial difficulty. If theyre making $300,000 a year and just dont feel like paying their bill anymore, thats not going to be acceptable, Gordon says.
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Does Negotiating Credit Card Debt Affect Your Credit
Negotiating credit card debt can hurt your credit, which is why it’s best to consider other options first.
If you’ve missed any payments, your credit score will already have taken a hit. And credit card companies often won’t negotiate credit card debt until you’ve been late on paying your bill.
Here are the ways negotiating credit card debt can affect your credit, depending on the type of agreement you reach with your card issuer:
- When you settle a debt, creditors generally report the debt as settled, rather than paid in full. This will be a negative mark on your credit report because it shows you didn’t fully repay money you borrowed.
- If the card issuer cancels your credit card, it will reduce the available credit you have, which can increase your . It can also reduce your average credit account age. Both those factors can impact your credit score.
The good news is that after you negotiate your credit card debt and fulfill your end of the agreement, you won’t have additional late payments or high balances recorded on your credit report. With no new negative information being posted, you can start to rebuild your credit.
Lawsuits And Legal Action
If you are being sued for credit card debt, you will receive a Statement of Claim. Suppose you ignore this notice or lose in court. In that case, your credit card provider may be granted a Judgment Order confirming that you owe the debt. This order gives the credit card company, or their collection agent, the ability to pursue harsher means to collect money like garnishing your wages or freezing your bank account.
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