Credit Card Debt Settlement Techniques

Settling credit card debt is one way of avoiding bankruptcy, or helping to reduce a debt that has become insurmountable. It involves making a deal with a credit card company to pay less than what you owe on the debt. However, be aware that settling credit card debt can have an adverse impact on your credit score and can have tax consequences, because the amount of forgiven debt may be taxed as income.

Prepare to Settle Credit Card Debt

The first step in preparing to settle credit card debt is usually to stop making payments on your credit cards. This may seem counterintuitive, but creditors generally will not work with you to settle debt unless they feel that the debt is not going to be paid. Credit card companies usually "write off" a debt (decide that it is not going to be paid) after payments are six months behind. When a creditor writes off a debt, they sell the debt to collection agencies for pennies on the dollar. Credit card companies are most likely to settle a debt after a few months of no payments, in order to avoid sending the debt to collections. Instead of making credit card payments during this time period, set the money aside so that when you do begin settlement talks with your creditors, you will have a lump sum of money to offer them.

Speak to Someone with Authority to Settle

You usually need to speak with a supervisor or someone with decision-making authority in order to settle a debt for less than what you owe. When a debt collector calls you, explain that you need to speak with a supervisor and then ask the supervisor whether she has the authority to work with you. Propose the terms of your settlement: you can offer to pay a set lump sum payment equal to less than what you owe, or you can offer to make a series of large monthly payments in exchange for less than what you owe. Creditors may be willing to settle a debt for approximately half the amount owed, although the exact percentage varies depending on the specific creditor, the amount owed and the companies' expected projections of how likely they are to be able to collect on the debt. Typically, the process of deciding to settle your debt will be a negotiation--you make an offer that will be countered by an offer from the debt collector.

Get Everything in Writing

Do not send any payments until you have a settlement offer in writing. The settlement offer should state the exact amount you are willing to pay, and should have language which makes it clear that the creditor is accepting that amount as "payment in full" on the debt. All correspondence should be sent via registered mail, and any guarantees made by the credit card company to settle the debt should be on official company letterhead and, if necessary, should be properly signed and notarized. Do not give credit card companies access to your bank accounts--instead, send a check along with a registered letter that restates the terms of the settlement. You may want to write on the check and/or in the accompanying letter that by cashing the check, the creditor is accepting or certifying that the check is full payment for the debt.