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.
If Your Monthly Credit Card Payment Rivals Your Mortgage Or Rent Or If High Interest Rates Are Making It Impossible For You To Get Rid Of The Debt It Might Be Time To Negotiate With Your Credit Card Company
On average, people hold around $3,100 in credit card debt, according to a 2019 Credit Karma analysis. And with a median household income of $61,937, according to 2018 Census Bureau data, most Americans likely use a substantial portion of their earnings to pay down consumer debt.
But when this debt becomes an unbearable financial burden, what can you do? One option may be to try to negotiate with your credit card company.
Credit card companies are about collecting the money. Theyre going to size this up and if they say, This is a person who sounds like a good risk and is likely to eventually repay this bill, then theyre likely to make concessions, says Mike Sullivan, a personal finance consultant with Take Charge America, a national nonprofit credit counseling agency.
If youre drowning in credit card debt, it may take a phone call to your credit card company to devise a workable solution. Dont know where to start? Heres a guide for how to negotiate with your credit card company.
What Are The Benefits Of Debt Settlement
Debt settlement, whether you manage it yourself or work with a pro, comes with some attractive perks that could work in your favor.
Settling your debts might:
- Help you save up to 50% or more off your or other types of accounts you can successfully settle.
- Protect you from being sued by creditors or collection agencies.
- Stop annoying collection calls or letters.
- Help you avoid filing bankruptcy.
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Pros Of Credit Card Debt Settlement
Debt settlement has the following benefits:
- You’re paying less overall on your debt in a much shorter amount of time. Paying the debt off immediately means paying no more interest, and settling means you’re paying even less than you currently owe.
- Debt settlement is less harmful to your credit than bankruptcy if your isn’t already poor.
Example. Ted owes $10,000 on his credit card. He’s six months behind on his payments. Ted’s six-month delinquency has hurt his credit however, bankruptcy would cause his score further damage. If he only makes the minimum payment, with interest, it will take him ten years to pay off the debt, and he’ll end up paying $18,000 total over that ten years. If he successfully settles the debt, he will be rid of the debt immediately and pay less than $10,000.
California Lawyer Urges Caution In Exploring Debt Refinancing Alternatives
It is easy for consumers to incur too much credit card debt, but if and when you are in that position, you should think carefully before resorting to a credit card debt settlement company. In fact, it might actually cost you more money in the end. At the Law Offices of Michael Jay Berger, I advise debtors on their best options for reducing or eliminating credit card debt, including bankruptcy where appropriate.
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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.
Arm Yourself Against These Credit Card Debt Settlement Scams
It can be so easy to get into credit card debtand so hard to get out of it. That is why many people turn to debt settlement companies to solve their problems for them. These for-profit services will negotiate with your creditors to agree to a lump sum payoff that is less than the amount you owe. You will then make monthly direct deposits into an account held by the settlement company until you have enough to pay off the settlement. It may be tempting to try to settle your debt this way, but you must beware of the pitfalls and scams that often come with it.
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Factor : How Old Is Your Debt
The final factor is the age of your debt. Generally after 180 to 270 days creditors will charge off your debt by transferring your debt to a collection agency. As your debt approaches the 180 day deadline, creditors may become more willing to settle. If they sell a debt to a collections agency, they receive only pennies on the dollar. Offering to pay back more than they can sell the debt for can encourage a creditor to settle.
If you have debt that is in collections, the collections agency is interested in clearing their books and will often settle.
If the debt is very old and that age is set by your states statutes of limitations, you may not be required to pay off this debt at all. Statutes of limitation on credit card debt is generally between three and ten years, but ALWAYS check with your state for exact information.
Zombie debt is aged-out debt that is being sold between collections agencies and pops up in debt collection demands. Always verify that the debt is yours and the age of the debt before making any payments.
How To Get A Debt Late Marks And Collection Account Removed From Credit Reports After Settling:
Debt collection companies dont request for the debt to get removed from your credit report after its settled and paid. That would require them to do extra work. Theyd have to contact the credit reporting agencies and make this request.
Unless, of course, you or your debt settlement lawyer specifically asks the collection agency to request the removal of the debt from your credit as part of your settlement. Best case, you get the collection agency to agree to these terms.
Negotiate this clause into the terms of your debt settlement.
Alternatively, after a collection account is settled and paid, you could dispute the notation from your credit report on your own. Hopefully, the collection agency will ignore the dispute because they have been paid already.
You see after a debt collection account gets disputed from someones credit report, the credit reporting agency contacts the collection agency asking for them to verify the debt. If the collection agency fails to respond within 30 days, the debt and its associated marks get removed from your credit.
You can dispute information on your credit report for free on Experian.com.
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Factor : Who Is The Creditor
Another factor in debt settlement is the creditor. Some are willing to negotiate while others will refuse regardless of your circumstances. Others will look at your state of residence, homeownership status, and employment in determining how much to settle. A good debt settlement company knows which creditor is likely to settle and what percentage they typically settle at. This gives additional negotiating power to the debt settlement company.
Pacific Debt has an excellent track record in working with creditors in many states. We will do our best to get you the best settlement possible. However, for more aggressive creditors, settlement percentages may vary or they may be less inclined to accept settlement funds in installment payments.
Contact us today to enroll in our debt settlement program. Our debt experts can explain to you exactly how our program works.
Using A Debt Settlement Company Is Even Riskier
Example. Josie owes $20,000 on her credit card and feels like she’ll never get it paid off. Her monthly payment is $500. She hears an ad for a debt settlement company called ABC Debt Settlement on the radio and signs up. ABC requires Josie to pay the $500 she would normally pay to the credit card company to ABC instead. ABC takes a $120 fee and puts the remaining $380 in an account, promising to negotiate with Josie’s credit card company when she accumulates $13,000. Although ABC notifies the credit card company of this arrangement, six months into the program, the credit card company sues Josie for defaulting on her payments and obtains a judgment against her for $20,000 plus interest. The credit card company then garnishes her wages, taking 25% out of every paycheck to satisfy the debt.
Even if a debt settlement company assists you, you’ll be paying a lot for services you could do yourself or would be better off paying to an attorney.
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When Is Debt Settlement A Good Idea
People often wonder why they should even bother with a debt settlement given that theyll already be in default and the damage to their credit standing will already be done. However, debt settlement can be a wise decision for two reasons: 1) It eliminates the threat of a lawsuit, which might force you to pay your full balance and 2) Paying what you owe is simply the honest thing to do.
With 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 take the debt settlement route, note that much like an attorney representing you in a legal matter, there are no guaranteed results in a debt settlement program.
Debt elimination or settlement is rarely successful, says Jeremiah E. Heck, partner in the Ohio-based consumer law firm Luftman, Heck & Associates. In my experience, the companies might be able to settle a debt or two, but in a very high percentage of cases, the consumer will eventually be sued by a creditor. At this point, there is little to nothing the debt settlement company is able to do for the consumer. Further, many of these types of companies charge large upfront fees that take away the ability of the consumer to offer settlements to the creditors.
Debt Management: An Alternative To The Credit Card Settlement Process
When consumers want to know how to settle with credit card companies without damaging their credit rating, we typically recommend a debt management program. Debt management involves setting a budget you can live with while you continue to pay down your debt over time. For a small fee, well take responsibility for paying all your bills on time you just have to make one payment to an account with ACCC each month and well take care of the rest. Well also work to seek reductions in interest rates, finance charges, and late fees to help you pay down your debt more quickly.
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Understand The Tax Implications Of Settling Credit Card Debt
If youre in debt and have only one or two credit cards that you need to clear up, you may want to look into settling your debt.
Its no secret that lots of debt buyers and collectors will negotiate to reduce the balance due and let you pay it off all at once.
After all, it makes sense for them to settle. Most companies buy past-due debt for a fraction of the face value, so when you settle they still make a profit.
You may think youre getting away with paying less by engaging in credit card debt settlement. Sometimes youre right.
But without proper planning and guidance, you may find yourself in a bad situation.
How Does It Work
During your free consultation, we will go over your entire financial situation with you to get an idea of what debts you have. Once you decide that you would like to proceed and retain our office, we must find out what credit cards you have and which ones you would like us to negotiate settlements for. We also must determine the current status of all the accounts . For example, some of your accounts may have been transferred to a collection company or may be a pending lawsuit.
If you are unaware of the current status or location of an account, we can help to determine this for you. Once we locate all of the accounts that you wish to settle on, we begin the negotiation process of contacting the lenders and making settlement offers. This is a complicated process that differs greatly among each creditor. That is why it is essential to have an experienced negotiator who understands the process and the intricacies of each company. What works with one company may not work with another. Fortunately, our countless years of experience has given our firm superb longstanding relationships with creditors and solid insight into their negotiation techniques and practices. This allows us to get the best settlement available for you.
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What Is The Best Credit Card Relief Program All Around
Debt resolution is the best option because:
- multiple debt relief strategies are built-in one program, including debt validation and debt settlement
- included is lawsuit defense by an attorney
- it offers the best overall savings out of any program
- the program contains legal protection from an attorney
- it can result in the removal of the debt, collection account, and late marks from credit reports
- monthly payments are lower than what they would be with consumer credit counseling and debt settlement
- Most unsecured debts qualify.
The best credit card relief program will depend on your situation and goals.
Avoid Paying Taxes On The Forgiven Debt
There are two circumstances under which you may not need to pay taxes on the amount thats wiped out in a credit card debt settlement.
Under Internal Revenue Code Section 108, you do not need to include the forgiven amount of the credit card debt in your gross income if the discharge occurs in a bankruptcy case or the discharge occurs when you are insolvent.
In order to waive the tax liability, youll need to file IRS Form 982.
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Within Five Years After Enrolling In A Debt Settlement Program:
- Your credit score is back up to 750
- You have no debt.
- You have $25,000 saved up in a Roth IRA.
Is the debt settlement program worth it in this example?
For most people, yes, it would be worth it. Of course, the consumer could have done even better if enrolled in a debt resolution program, but even so, debt settlement is worth it in this case.
The key is, you have to have a long-term financial plan in place to rebuild your credit score, save the maximum amount of money and ensure your program is successful.
How To Get Extra Help With Debt
Debt payoff can seem overwhelming and complicated, but there are many resources that can guide you. A good place to start is, again, a nonprofit credit counseling agency, where you can receive a free initial consultation and get help with budgeting and debt reduction strategies. If you’re not only dealing with debt collectors but you’re also involved in a lawsuit related to your debt, a lawyer experienced with consumer debt issues is the best person to work with you can find free local legal assistance through the Legal Services Corporation’s search tool.
If you’re feeling burdened by debt and you’re unable to pay for basic needs, call 211 to connect with services in your area that may offer rent, mortgage, utility or medical bill assistance. Other types of financial assistance may be available from the federal or state government, and you can take a look at the programs you qualify for at Benefits.gov.
Don’t forget to engage with organizations that work with specific populations you might be a part of, such as Military OneSource, which serves military families and offers financial and legal resources.
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Negotiating Credit Card Debt
If youre drowning financially and need help with credit card bills, you may wonder if its possible to negotiate your credit card debt. Options may include a partial settlement, a workout agreement, or even payment reduction for a few months.
There are key steps to negotiating credit card debt, but theyre not simple. Youll have to find a plan that works for you when trying to negotiate credit card debt. Options include a workout arrangement, forbearance, debt management plan and debt settlement.
Debt settlement program
With a debt settlement program, you negotiate a settlement for less than the full amount owed. The credit card debt negotiation depends on whether or not the individual creditor will work with you. And you need to understand that paying less than you owe impacts your credit score and some forgiven debt is viewed as income and may have tax consequences.
Debt management program
With a debt management program, a certified counselor negotiates credit card debt arrangements for you. Youll pay back your principal in-full, but your interest rates are reduced or even eliminated. Late fees and penalties may be waived. Youll only have one payment to make each month instead of several. Your credit score stays intact and may even improve while on the program. The key to a successful debt management program is that more money goes to eliminating the principal, while high interest rate charges end.