Settling credit card debt, also referred to as negotiating credit card debt, is a formal arrangement you work out with your creditors to pay off your balances for less, sometimes for a fraction of the amount you actually owe.
So, why would your creditors agree to settle your credit card debt for less than the amount for which you are obligated?
In some cases, they may not be interested in settling and reducing your payment responsibilities. Yet, in certain circumstances creditors will negotiate a settlement to recover at least some of the money they are owed and to avoid the cost of hiring a collection agency or taking legal action.
Settlement may be one of the last solutions you have to help eliminate your debt — before you are in the dire position of having to file for bankruptcy, which comes with its own set of complex issues and long-term ramifications.
For example, say you have three credit cards and all three are maxed out. You can no longer afford to pay even the minimums on each of those cards. As a result, you are behind in making payments by several months, and have begun to receive calls from collection departments.
What can you do? A new unsecured consolidation loan is typically not an option since you may not be able to find a financial institution that is willing to lend you any more money. And if you rent your dwelling, you don't have collateral to get a secured loan.
Since you can't afford to pay your minimums, a consolidation company or credit counseling organization may not be a viable avenue to pursue. Though you should certainly try to contact them first to ascertain your options.
In other words..
If you have reached such a point with your level of debt, where there is absolutely no way you can continue to pay even the minimums on your cards — and if you convince your creditors of your situation — they may just agree to lower your final payment amount and take whatever they can get out of you.
Settling credit card debt may be more attractive to them compared to your filing for bankruptcy, where they potentially stand to lose an even greater amount. They also may opt to negotiate credit card debit in lieu of the need to invest resources in chasing you down, hiring a collection company, or taking you to court.
Yet, be aware that negotiating a settlement to take care of your debt will have a negative effect on your credit score and your ability to get loans in the future. That's why settlement is among the last decision you should make (before filing for bankruptcy) for meeting your financial obligations.
How to Proceed in Settling Credit Card Debt
The way you settle debt with your creditors is through negotiation. There are three ways to handle a settlement agreement.
There are pros and cons to each of these approaches. Hiring an ethical debt settlement company or attorney to handle the negotiation with your creditors enables you to benefit from knowledge and experience. The result can be a greater discount on the money you owe.
Yet, you do pay for this expertise either by the hour, with up-front fees, or according to how much debt you owe or money you save.
Settling credit card debt is a major decision. You need to make sure you have exhausted your other credit card debt relief options and then determine how you want to proceed.
If you choose to have outside representation, thoroughly research the firm or individual you want to hire. Also before proceeding, know what you will need to pay for services and get it in writing.
For more information on settling credit card debt, please see the articles below.