Can You Negotiate a Payoff With Credit Cards?

If you cannot make payments on your credit cards, you may seek a way out of your predicament. One avenue is negotiating a payoff with your credit cards, so you do not have to pay the full amount but are no longer liable for your debt. While this may seem to be a better way out than bankruptcy, each type of debt settlement has its advantages and disadvantages.

Direct Negotiation

If you want to lower the amount you owe on your credit cards, direct negotiation with your creditor may be your best option. Unfortunately, most creditors will be less likely to negotiate with you unless you have missed a few payments. Creditors "charge-off" debt after six months of non-payment, and most would rather collect at least something from you instead of sending a debt collection agency after you for repayment. Depending on your situation, you can ask for an interest rate reduction, a balance reduction or both. Typically, to receive a reduction in your balance you must make an upfront payment of the entire amount of the reduced balance. While creditors may be more likely to agree closer to the charge-off date, they are under no obligation to do so.

Debt Management

A debt-management program is a type of payoff negotiation that uses the help of a third-party service. While the Federal Trade Commission warns that many debt-management programs may be deceptive, certain nonprofit counseling services can be of service. Essentially, a debt-management program negotiates with your creditors to lower or stop interest payments altogether if you agree to make a set monthly payment. While a monthly payment plan may work better with your cash flow than a directly negotiated upfront payment, you will have to pay the debt management service fees as part of your monthly payments.

Taxes

One of the major negatives of negotiating a settlement with your credit card company is that you will owe taxes on the amount of debt your creditor cancels. For example, if you negotiate your $50,000 debt down to $20,000, the IRS considers that $30,000 of forgiven debt to be taxable income.

Bankruptcy

While you may consider bankruptcy to be your last option, or not even an option altogether, in some situations, it may make more sense than simply negotiating with your creditors. When you discharge your debts in bankruptcy, you do not owe taxes on the cancelled debt, as you do in a debt-management plan. While bankruptcy will damage your credit report, so will missing payments to your creditors and paying them less than you owe.