When you decide that debt settlement is your best option to deal with your outstanding credit card balances, you negotiate a one-time pay-off to your creditors in exchange for having the account fully settled and closed. Creditors are willing to negotiate with you as they would prefer to get some of the funds rather than risk losing it all. You can hire a third party to help with the settlement process, but you can absolutely do this yourself and avoid the fees charged by service firms.
Keep Your Intentions Secret
The moment you call your creditor and tell it you want to settle the account, you may find yourself dealing with a whole slew of consequences. The creditor may panic and decide to close your account, which can lead to higher interest rates, suspension of charging privileges, and loss of any reward or loyalty points. These things may happen anyway, but as long as the creditor is not certain you are preparing to offer a settlement, you will have more options available to you.
Cease Making Payments
As long as your account is current, the creditor really has no motivation to settle with you. Even if you are just making minimum payments and barely making a dent in your principal, the creditor is still earning fees and interest, and does not have to classify the account as a nonperforming account. To get the attention of the creditor, stop making your monthly payments in any form. Your charging privileges will be suspended and your credit profile will suffer greatly due to the delinquent status being reported. Usually after 90 or 120 days of not receiving payment, the creditor will be more inclined to accept a settlement offer. Just be sure to redeem any loyalty rewards prior to missing payments -- you will likely forfeit those once you fall behind.
Save Cash
Since settlements are one-time offers, you will need to start building up a pile of cash you can use to offer an appropriate settlement amount. You want to have at least 50 percent of the outstanding balance available in cash to make the payoff offer. If you negotiate well, you may be able to pay 30 cents on the dollar, but typically, settlements are closer to 50 cents on the dollar. Once agreed to, you must pay the settlement in full, usually within a few business days of the offer being accepted. Make sure you are able to deliver on your payoff promise to avoid further complicating the scenario.
Evaluate Your Offer
Additionally, at this stage, provided you did not tell the creditor your intent to settle, you may find that you have enough cash to pay down the card, get reinstated and then service the account properly. While having late payment remarks on your credit profile is not great, it sure looks better than a charged-off account. You may be hesitant to miss out on the chance to save some money, but you may be able to get back into good standing and continue to use the credit card -- provided you feel better about managing your credit going forward. If after this analysis, you decide that settling is still the best option, do your best to negotiate the best offer the creditor will accept.
Be Prepared for Consequences
Once your account is settled, it becomes a charged-off account from a credit reporting standpoint. You may have saved some dollars and the savings very well may have been worth it. However, your account will be reported negatively for up to seven years on your credit report and it will hinder your ability to get credit on favorable terms. The creditor may also prohibit you from obtaining credit from it ever again. The creditor can also report the amount of debt you did not pay as cancellation of debt income and you may have to pay taxes on that amount just as you would getting a cash payment from someone. Sometimes, you can soften the blow of these items by negotiating with the issuer and requesting the account be reported in a certain manner. However, expect that even the best, most agreeable settlement process will still leave you negatively impacted.
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