How to Settle Credit Card Debt at a Reduced Amount

Generally speaking, creditors are more likely to lower your interest rate or alter your payment terms rather than reducing the amount of debt you owe. Since you make a legal agreement to pay your debt when you open a credit card account, creditors have various legal means to enforce your repayment of the debt. Ironically, the more you fall behind on your payments, or otherwise show an inability to pay, the more likely your creditors are to settle your debt for less than you owe. Of course, debt settlement damages your credit score and could result in adverse tax consequences.

Instructions

1

Research the ramifications. Before you act, realize that settling a debt for less than you owe could have a serious negative effect on your credit report. The credit reporting agencies will show your settlement for seven years, during which time creditors may be more reluctant to offer you credit. Additionally, the federal government usually considers forgiven, canceled or settled debt to be taxable income. For example, if you negotiate your credit card debt down from $50,000 to $30,000, you must report the $20,000 in canceled debt as taxable income.

2

Stop paying your bills. Your creditors are unlikely to negotiate with you if you show a perfect payment history, reflecting an ability to pay. Only if you fall behind in your payments will your creditors feel that they are less likely to receive payment.

3

Call your creditors. Tell them you are having financial difficulties and cannot keep up with your payments. Your creditors may ignore you, or they may offer you a basic settlement plan.

4

Wait for a better offer. As with any negotiation, the first offer you receive from your creditors is unlikely to be the best deal you can get. As time goes by, and your creditors still are not receiving payments from you, they may be more likely to attempt to get at least some money out of you.

5

Make another offer after a few months. Typically, a credit card company will charge off debt as not collectible after six months of non-payment. As this date approaches, your creditor may be more receptive to settlement offers, particularly if you are willing to make a lump sum payment. After charge off, you still owe the debt, but your original creditor is more likely to consider your debt a tax loss and sell off the rights to collect to another agency.

6

File bankruptcy. If you cannot negotiate your creditors down to the level you would like, you can always file bankruptcy. In some cases, bankruptcy may even be a better option. By the time you consider bankruptcy, your credit score is probably already severely damaged, so filing bankruptcy will not make it much worse. In fact, bankruptcy may allow you to discharge the total value of your debt without requiring any payment at all. Additionally, any debt you discharge in bankruptcy is non-taxable, unlike any negotiated settlement you reach with your creditors outside of bankruptcy.