Get The Settlement Terms In Writing
Once you reach an agreement, youll want to get the terms of your settlement in writing before paying the settlement amount. The letter should state the amount the creditor will accept in satisfaction of your obligation and the date you must pay the funds. If you skip this step, youll have a hard time proving the existence of the agreement.
Under federal law, creditors must report canceled debt to the IRS, so if you successfully negotiate down your debt balance, youll likely receive a 1099-C for the forgiven amount at the end of the year. In other words, plan to pay taxes on the canceled debt.
If the credit card company forgives enough debt, you might find yourself facing a significant tax billand it isnt easy to get rid of tax debt. In most cases, youll have to pay it.
The Pros Of Professional Debt Settlement
Although debt settlement does have many great benefits, its not the only solution available to those in need of debt relief. A professional will assess your specific situation and do their best to pick the best option, be it debt settlement, or any other of the many options including:
- Debt consolidation
- Consumer proposal
- Personal bankruptcy
When youre negotiating a debt settlement, creditors will generally attempt to get as much money out of you as possible. Without the help of an expert debt negotiator, you may not get the most beneficial terms to settle your debts. In other words, you may end up paying more than you would have needed to settle your debt. You could negotiate with creditors on your own, but, it is safe to say that with an experienced professional you will get a better settlement offer and you will end up paying back less.
Check out what questions you should ask your debt collection agency.
How To Negotiate Directly With Your Credit Card Company
- Jennifer Thomas
If your credit card bills are coming in fast and furious, and youre having a hard time keeping up, youre probably hoping for some relief. And in some cases, you might be able to get it by negotiating directly with your credit card company.
Many credit card issuers offer hardship plans or will allow you to settle your debt for less than what you owe. It isnt necessarily easy, but it might be just what you need to get caught up on your debt.
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How Does Credit Card Settlement Work
The benefits of credit card settlement are clear: You may be able to get out of debt more quickly without the responsibility of the full debt load. However, your credit score will likely drop as a result of debt settlement, and you may have tax consequences down the line. If you settle a $15,000 debt for $10,000, for instance, you may be taxed on that $5,000 difference.
Handling Debt Negotiation On Your Own
When it comes to credit card debt negotiation, the CFPB says that the first thing you need to think about is why you are in debt. Is it a temporary job loss or long-term issue? Understanding how long you might be in this situation can be helpful when you call your creditors to negotiate.
During the height of the pandemic last year, many credit card companies offered deferment. Deferment allows you to temporarily stop making payments for a set period. Some creditors even allowed customers to extend deferment between 3-6 months.
Now, however, creditors are becoming less flexible with customers. But it still may be possible to negotiate for an extra deferment period or to extend your current deferment agreement.
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Can I Get A Settlement Figure On My Credit Card
You can negotiate a settlement for credit card debt, but doing so could negatively impact your credit for 7 years. If your credit card debt has become unmanageable, you are wise to seek help and explore your options, such as requesting a lower interest rate.
How to negotiate credit card debt settlement by yourself
Stop Using The Credit Card You Are Trying To Settle
This is an important first step thats pretty painful for a lot of consumers to accept. You must stop charging and certainly do not take a cash advance or balance transfer. Make sure you stop using all of your credit cards from the bank/creditor you are trying to settle with. For example, if you have two American Express cards and one you want to settle and the other you are currently using, it is unlikely that the creditors will negotiate with you. Also, do not open any new cards, especially from the same creditors you are trying to negotiate with
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Have A Conversation With The Debt Collector And Take Notes
- Be aware of any violations they may perpetrate
- Ask a lot of questions and get clear on your agreement
- If they threaten to sue, ask when and if you will receive a notification from them
- Write down notes and ask for written documentation supporting your agreement
- If you cannot agree, end the conversation, call back later, and ask to speak to a decision-maker
- You cannot open any other credit accounts while on a plan
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.
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Should You Do It Yourself
If you decide that a debt settlement is the right move, the next step is to choose between doing it yourself or hiring a professional debt negotiator. Keep in mind that your credit card company is obligated to deal with you and that a debt professional may not be able to negotiate a better deal than you can. Furthermore, the debt settlement industry has its fair share of con artists, ripoffs, and scams, which is why many people choose to try it on their own first.
Debt settlement can adversely impact your credit score, making it more difficult to borrow money at affordable interest rates in the future.
What Happens After Credit Card Settlement
The money that you would have paid your creditors goes into a savings account, usually managed by a debt settlement agency. … If your creditors accept the credit card lump sum settlement, your debt is erased. You may have to pay taxes on the money you saved, along with fees to the debt settlement agency.
How to Remove Settled Accounts from Credit Reports
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What Should You Avoid Doing While Negotiating A Debt
Debt arbitration is an effective way to lower your debt and obtain relief from your creditors. When negotiating with your creditors, you can avoid a few popular blunders to improve your chances of a good outcome.
- Do not be rude or demanding during the negotiating process. Always be courteous and respectful. Your aim is to gain acceptance for a limited period of time while preserving your integrity.
- Be sincere and justify your condition to the manager when you bring it to him. Financial difficulties are temporary and can affect anyone.
- Be practical and include your debt settlement options do not construct castles in the sky, as bankers can request documents.
- False claims and phony business agreements will not persuade the creditors. Companies that issue credit cards will conduct a comprehensive investigation.
- Direct deposits and reserve funds should not be placed in bank accounts linked to your credit card. When you go to negotiate, banks will have access to your accounts.
Look At Your Overall Picture Before Making A Decision
Only you know what you can afford as you negotiate with a creditor. Before agreeing to a plan of any kind, make sure the payments youre agreeing to fit your budget.
All the negotiating in the world wont help if you still cant afford to pay the agreed-upon amount. And things could be worse since youll have to go back to the drawing board with less strength from which to negotiate.
So, if you dont already have a budget, make one. Or at least do some quick math to find out how much youre spending on gas, food, the mortgage, and other essentials so youll know how much you can spend paying down your credit card debt.
Orderly Payment Of Debt Program
Consolidated Payment at 5% Interest
If youre a resident of Alberta or Nova Scotia, you may qualify to enter into a consolidation order known as an Orderly Payment of Debt program . Other provinces used to offer this program, but have stopped offering them because non-profits have been doing such a good job at helping consumers through their credit counselling and debt management programs.
Through an OPD program, you pay back the full amount that you owe on your unsecured debts typically over a period of 3 years. The interest rate is set at 5% and you are able to keep your assets. Your creditors must agree to your OPD program and the courts must approve it.
To find out if OPD is a good solution for you, contact the agency that administers your provinces OPD program.
When Bankruptcy Is A Better Option
If you owe enough credit card debt, bankruptcy can have a distinct advantage over negotiating down your debt. Why? Because you wont pay taxes on credit card debt thats wiped out in bankruptcy. Keep in mind that once you negotiate down a debt and the taxes are assessed, youll likely be stuck with them. Youll want to make the decision to file for bankruptcy before you strike up a deal.
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If You Cant Pay Your Credit Cards Then Stop
It is sometimes necessary to stop paying the cards because credit card companies will generally not resolve the balances if you do not show a hardship for being in debt. Trust me, they will be happy to continue to accept your minimum payment for the next 20 years since it includes a lot of interest and there is always a chance that you will continue to use your credit cards and rack up more debt.
Why Credit Card Companies Negotiate Debt
When finances get tight, credit card payments are often one of the first bills people let slide. After all, credit card debt is unsecured. If you dont pay your auto loan or your mortgage, your car or house could be at risk. The same isnt true with credit cards.
Thats not to say that falling behind on credit card payments isnt dangerous. When you pay any bill late, credit card bills included, you may damage your credit. Credit problems can haunt you for years. Plus, if you default on a credit card bill, theres a chance that the bank might sue you, and that leaves you vulnerable to more potential problems.
Still, credit card issuers are aware that your unsecured credit card debt may be at the bottom of your priority list if youre in a financial bind. When you fall behind on a credit card bill, the banks priorities may shift. Rather than risk you ignoring debt or filing for bankruptcy, a card issuer may be willing to consider negotiating credit card debt so that it gets back some of its money rather than nothing.
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Try To Settle Before Your Account Goes To Collections
If you’re having trouble paying down your debt, it’s best to be proactive. You’ll likely have more success with debt negotiation if you try to settle your debt before it goes to collections.
However, there is no way to know how a credit card company will react once you make the call. Some will be willing to work with you, and some will not make any effort at all.
You should be careful about how much you tell them when negotiating your debt. If you lost your job or have had a family emergency, they may be more willing to work with you for a while. But if you tell them you just can’t afford to pay because you have too much debt, they may be less likely to help out.
Be Aware Of Possible Disadvantages
Negotiating a credit card debt settlement can have some downsides that you should be aware of before making a decision to do it.
Depending on how it plays out, negotiating a credit card debt settlement can significantly lower your .
Even before you enter into an agreement, companies may close your account or prevent you from using the credit line any further. The process can also temporarily lower your access to capital from other borrowing sources as you are now seen as a bigger risk.
Other lenders may charge you higher interest rates to compensate for your heightened default probability. In some states, your insurance costs for things like automobile insurance might rise. The length and severity of these outcomes will be far worse with a bankruptcy filing, so it can still be worth it to go through with the settlement.
It’s also important to note that forgiven credit card debt can be treated as taxable income. If the total debt forgiven is $600 or more, the lender is going to give you a Form 1099-C, Cancellation of Debt to use in your personal tax filing. Do not try to avoid claiming this as the IRS is going to be notified of it by the lender.
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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.
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.
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Why Bother Negotiating To Start With
As individuals, credit can get us ahead in life. Just imagine how hard it would be to buy a house if you had to save $200,000 of your own money while simultaneously paying rent.
When youre drowning in too much credit, you risk losing the buying power credit gives you. By getting your credit cards under control, youll save yourself a lot of money down the line.
Even if you already have a car and a house and feel like you could let your credit score go, think about what you dont know and how credit could help:
- What if you needed to borrow $12,000 for a new HVAC system next winter?
- What if you had a great idea for a new business but needed to borrow some capital to get it going?
- What if your son or daughter needed you to cosign on a loan for a car or a student loan in a few years?
These are among the dozens of good reasons to keep your credit score as high as possible to keep yourself a viable participant in the credit market.
If out-of-control credit cards have you on the verge of losing this ability and you see very little hope for paying off your cards, start the process of getting out from under that debt by asking for help.
You arent asking for forgiveness or an unreasonable favor just a better way to keep moving forward.
Theres No Better Time To Negotiate Credit Card Debt Than Now If You Are Struggling Because Of Covid
While negotiating yourself is the cheapest option, it may be in your best interest to get help if you have too much debt or cant work out a repayment plan with your creditors on your own. Set up an initial consultation with a credit counselor rather than choose a debt settlement company or file for bankruptcy, suggests Nikki Dunn, a certified financial planner and founder of She Talks Finance.
A debt management program through a credit counseling agency can help you consolidate your debts and lower your interest rates at a small cost, whereas debt settlement companies are known to engage in deceptive and unfair practices and could cost thousands of dollars.
Thats why its important to do your homework before you enroll in a debt payoff program. Look for nonprofits that are accredited by groups such as the National Foundation for Credit Counseling or the Financial Counseling Association of America .
A good question to ask any credit counseling agency or debt settlement company youre thinking about working with is: What can you offer me that I cant do myself?, Dunn says.
Whether you choose to negotiate yourself or work with a professional, be sure to give your finances a thorough look first, so you can carefully weigh your options.
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