Debt settlement is a flexible debt management plan that eliminates credit card debt for less than the full balance owed. You can direct the process or hire a for-profit firm. Either way, you are in control and can choose to settle all of your credit card debts or just one or two.
Charge Offs
Credit card companies usually close accounts after they become six months past due and list them as charged-off. Settlement is usually a possibility after three months, although it remains an option even after the account has been charged-off and sold or transferred to a debt collection agency. A charge-off by the card company is just an internal accounting term and does not relieve you of responsibility to pay. Charge-offs hurt your credit score and are listed on credit reports.
Alternative
The Federal Trade Commission recommends debt settlement as an alternative to bankruptcy, especially for people whose credit problems are caused by excessive credit card debt. Bankruptcy is the worst possible event for your credit and requires years to recover. Debt settlement will hurt your credit score as well, but does not have nearly the stigma of bankruptcy. Debt settlement information remains on your credit report for seven years, while bankruptcy remains for up to 10 years.
Negotiations
Debt settlement is easy to do yourself once you become comfortable negotiating with credit card companies or debt collection agencies. Negotiating over the phone with a professional debt collector can be intimidating at first. Approaching the call as a business discussion can help you control your emotions during the call. Some people engaging in debt settlement for the first time communicate only in writing. This removes some of the stress and creates a paper trail, although the process is faster by telephone.
Options
By conducting the process yourself, you can choose which of your credit card debts to settle. If you hire a debt settlement firm, you have the right to tell them which accounts to settle as well. Savings on debt settlement can be significant. SmartMoney reports that credit card companies typically settle for 20 to 70 percent of the balance, but most accounts can be settled for about 50 percent.
Warning
It may not be possible to keep all your credit card accounts even if you choose not to include some in the settlement process. Eventually all of your creditors will learn that you are settling debts for less than the full balance, and that could prompt some to arbitrarily close accounts because they now regard you as a credit risk. Each time you settle an account, a note will be added to your credit report indicating that you "settled for less than the full balance." Some card companies regularly review customer credit reports and reserve the right to close accounts or reduce credit limits. Accounts closed by a card company can also be settled.
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