Credit Card Debt Negotiation & Reduction

With consumer credit counseling agencies, there are programs in place that can help you negotiate and settle your debt---and even pay less than what you owe. However, many of these programs charge a fee for their service. Luckily, it's possible to negotiate credit card debt and obtain a debt reduction on your own, as long as you understand how the system works.

How to Negotiate Debt

The first step in negotiating to reduce your debt and pay less than what you owe is to stop making payments. Creditors only negotiate when they want to avoid selling a credit account to a collection agency, because when that happens they only get pennies on the dollar. So your account has to be in danger of going to collections or already in default before creditors will find it advantageous to reduce your debt and accept a settlement.
This is when you can begin to negotiate terms of the settlement, and it's best to negotiate in writing, via registered letter. Creditors are usually more willing to accept a single, lump-sum payment, so if you save money during the months you're not paying your debts you'll be able to make a settlement offer. Some creditors are also willing to work out a monthly payment plan. You can make an initial offer, which creditors may counter. Typically between 30 ad 50 percent of your debt can be reduced, depending on how much you owe and how likely creditors believe you are to default entirely.
Keep all paperwork associated with the settlement, including your offer and the responses. If you must negotiate on the phone, make sure you get everything in writing before you send any money. Once you and your creditors have come to an agreement, make sure you have a letter specifying the amount of money you have to pay, how you will pay it (all at once or in monthly installments), and a statement that the settlement is being accepted as payment in full for the debts (make sure the debts are listed). At that point, send a check or money order---never give creditors access to your bank account.

Impact on Your Credit Score

Negotiating debt can have an adverse impact on your credit score. Your payment history makes up 35 percent of your credit score, and when you stop making payments this will be reflected on your credit report. Similarly, when you settle a debt for less than what is owed, this is also noted on the credit report and the account is listed as "settled," as opposed to "paid in full." This can lower your credit score and remain on your credit report for up to 10 years.

Tax Implications

The amount of debt forgiven is, in most states, considered to be taxable income. This means you will get a 1099 form at tax tim, with the amount of money listed as income. Generally, you will have to pay at least 15 percent of the forgiven amount in taxes, although it varies depending on your tax bracket and income. Speak with an accountant to gain an understanding of the implications of this decision, and be prepared to have the money to pay the IRS come tax time.