Credit Card Debt Settlement

What is Debt Settlement?

In its simplest form debt settlement is reaching an agreement with your creditors to resolve a debt for less than the amount owed.  If you have $30,000.00 in credit card debt, for example, you may be under a great deal of stress depending on if your monthly net income can handle at least the minimum payments. If not, you may have already fallen behind on your debt obligations.  Credit card companies, as well as mortgage and auto lenders don't like to settle accounts for less than the original amount borrowed, or in the case of credit cards, the amount charged. However, if they have a reason to believe that you will not fullfill the original obligation they may be willing to take a settlement in lieu of the total amount due on the account.

So how do credit card lenders determine if they have a reason to believe you won't repay the debt in full? If you have been making your credit card payments on time for years, even if it is just the minimum payments, credit card lenders are unlikely to agree to a settlement - after all you seem, to them, to be able to handle your debt load well enough.

Is Debt Settlement a Good Option

On the other hand, if you have steadily fallen behind on your credit card payments over a period of months and are currently 90 or more days behind on multiple accounts the credit card lender may look at your credit report and determine that you are in financial jeopardy. If they make this determination they may decide it is better to get a reduced amount, or a settlement from you rather than take the risk that you will completely default leaving them with nothing if you eventually turn to a Chapter 7 bankruptcy.

If you are, however, current and you decide that you still want to settle there are many implications. First of all, as mentioned above credit card companies have to have a reason to believe you are not going to be able to repay your debt. So in order to convince them to settle you will have to start missing payments. Missing payments will quickly destroy your credit score. A tumbling credit score can immediately have many bad affects. First and foremost the cards you fall behind on will raise your interest rate and simultaneously hit you with late payment penalties as high as $30.00 or more per month.  In addition, you may find it next to impossible to get an auto or home loan after your FICO score falls below 620.

You may have already reached this conclusion from the information above, unless you are already behind on payments, debt settlement will destroy your credit score. If you are already behind on your credit card payments, settling a debt for less than the full amount owed will not cause your credit score to fall by much more.

Using a Debt Settlement Company

Your second option for debt settlement negotiations is to use a debt settlement company.  These companies specialize in negotiating with creditors to reduce the amount you have to pay to settle the debt.  Again, if you have good credit, this method will destroy your credit rating. Generally, debt settlement companies will review your debt obligations and come up with a payment plan. You will begin making payments to the debt settlement company and quit making payments to your creditors.  The debt settlement company will hold your payments in a trust account and not pay your creditors. There goal is to make sure that your creditors realize that you are in financial trouble and cannot pay the full amount owed.  By withholding payments they are giving credit card lenders a clear message that you are not able to resolve the debt as originally agreed.

You should be aware, that unlike bankruptcy, entering into an agreement with a company that settles debts does not protect you from harassing calls from creditors or collection agencies.  They can still call you at work and at home and use all legal means to track you down and attempt to get payment for the debt obligation.

By law creditors can do the following when attempting to collect a valid debt

  1. Call you between 8:00 am and 9:00 pm (this has to be your local time, not the local time of the collector)
  2. Contact you via phone or writing unless you give written notice that you dispute the debt and cannot make payment. After giving written notice they may only take you to court and attempt to get a judgement
  3. Credit Card Companies as well as other creditors can call you at work unless you tell them orally or in writing that you do not wish to be contacted at work.
  4. Collection agents can inform you of the debt owed but cannot in any way misrepresent the debt or inflate the amount owed. They can however add on legitimate late fees, interest fees, and over the limit fees.

Payments Versus a Lump Sum Settlement


Many creditors are willing to accept as little as 50% of the current balance or less when you are at the point where you can negotiate settlements because you have fallen behind on payments.  However, some people can't come up with a large lump sum settlement. If you owe $10,000.00 to one creditor, even half of that is a large sum of money.

Many creditors will negotiPayments Versus a Lump Sum Settlement

Many creditors are willing to accept as little as 50% of the current balance or less when you are at the point where you can negotiate settlements because you have fallen behind on payments.  However, some people can't come up with a large lump sum settlement. If you owe $10,000.00 to one creditor, even half of that is a large sum of money.

Many creditors will negotiate a reduced amount with monthly payments. The trade-off is that they will not reduce the amount owed asmuch. Many will reduce the amount up to 70% if payments are part of the condition of settlement.ate a reduced amount with monthly payments. The trade-off is that they will not reduce the amount owed asmuch. Many will reduce the amount up to 70% if payments are part of the condition of settlement.