Do Credit Card Companies Negotiate With Their Customers to Reduce Debt?

Credit card companies usually send accounts to collection agencies when no payment has been received for 180 days. In such cases, cardholders may have to pay the full amount they owe to the collection agency. Therefore, it's better to try to negotiate a debt-reduction settlement with a creditor before your account is referred to a collection agency.

Function

The U.S. Federal Trade Commission (FTC) website recommends that consumers make an effort to work out debt-reduction settlements with credit card companies if they're struggling to pay their card issuers. The FTC notes that cardholders can try to reduce their debts without using the services of a debt-settlement company by contacting a card issuer's customer service department. However, it's important to work out agreements that reduce your credit-card bills to amounts you can afford to repay. Creditors will likely be unwilling to offer further concessions if you agree to settle your debts for amounts that are less than what you owe and then fail to pay them.

Considerations

A Smart Money article titled "Debt Settlement: A Costly Escape" asserts that credit-card companies try to make it difficult for cardholders to negotiate debt settlements. According to the article, some card issuers refuse to even consider reducing the amounts cardholders owe unless they're at least three months behind on payments. Yet a New York Times article titled "Credit Bailout: Issuers Slashing Card Balances" notes that the enactment of the Credit Card Accountability, Responsibility and Disclosure Act in 2010 may make some credit card companies more willing to negotiate settlements with their customers. The legislation hampered card issuers' profits by restricting some rate increases and fees. Therefore, companies may be willing to negotiate debt settlements with cardholders to protect a portion of their profits.

Significance

It can be costly not to work out a debt-reduction settlement with credit card issuers yourself. According to the FTC, some debt-settlement companies require their clients to deposit money for the company's fees into a bank account that is handled by an account administrator. Clients could end up paying several types of fees, including a sign-up fee and a monthly service fee that lasts as long as a client participates in a debt-settlement plan. Some fees also may be based on a percentage of the amount of money a client saves through a debt-reduction plan.

Effects

Waiting to negotiate debt settlements with your card issuers can damage your credit rating. That's because credit-card companies often aren't willing to settle accounts unless cardholders are already behind on making payments. Creditors usually report late payments to credit bureaus when accounts are delinquent at least 30 days. Every reported late payment will hamper your credit score.

Warning

Successfully negotiating debt-reduction settlements with your creditors may have tax consequences. Some credit-card companies report debt settlements to the Internal Revenue Service (IRS). In turn, the IRS may consider any amount of debt a creditor doesn't require you to pay as income that needs to be reported on your tax return. One exception to that rule would be if the IRS determines that taxpayers' debts are more than the total value of their assets.