When you can't make payments on your credit card debt and you're considering bankruptcy, negotiating a debt settlement with your credit card company can help you avoid a chapter 7 or chapter 13. But before beginning the negotiating phase, understand debt settlements and recognize how settlements affect your credit history.
What is a Settlement?
A settlement is an agreement or contract between you and your credit card company that permits you to satisfy your outstanding credit card balance for less than the amount due. The savings realized by a debt settlement vary and depend on what your credit card company will accept. Reaching a settlement agreement can take time, and your credit card company will likely counter your initial offer and agree to settle for a different amount.
Purpose of Settlement
Debt settlements are effective financial moves if you owe several creditors and can't keep up with your payments. Rather than risk default or bankruptcy, you can ask creditors to forgive a percentage of what you owe. They obtain the amount of your settlement and agree to collect no more on the account. By agreeing to a settlement, credit card companies agree not to sue you for any remaining balance.
Settlement and Credit History
Debt settlements are advantageous because they provide debt relief. But settling a debt can have a negative impact on your credit history and score. Credit card companies rarely accept a debt settlement and then report an account as "paid in full." You can expect your credit card company to send a notification to the bureaus stating that you settled the account. The problem with this type of update is that future creditors and lenders will check your report and see that you didn't fulfill past financial obligations. With knowledge of this, these creditors and lenders can reject your application, or charge a higher interest rate because of the increased risk that you will not pay your debts.
Considerations
Before discussing debt settlement, make sure you have enough cash to settle the account, as settlements are typically paid in a lump sum. Since credit card companies may attempt to collect money or file a lawsuit after a debt settlement, get an agreement in writing before giving them your money to settle the account. Retain a copy in your files.
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