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Chapter 5: Credit Card Debt Settlement

At the most basic level, there are two types of debt settlement; a lump sum settlement and setting up a payment plan.  Lump sum settlements can be through attorneys, debt settlement firms (if you can find a reputable one) or do it yourself.  Payment plans can be though credit counseling agencies or do it yourself.

Thoughts about Settling Your Credit Card Debt on Your Own (scroll down)

Working with Your Creditors

The first strategy for surviving credit card debt should be to attempt to work with your creditors.   In today’s economy numerous articles, reports and web sites have stated that credit card banks are willing to work with cardholders in financial difficulty.

The key to working with your creditors is to give them early notice of your financial difficulties. For example, “I just lost my job and I am having difficulty paying both monthly living expenses and my credit card debt.  I need to work out a payment plan with you or stop making payments.”

Before calling your creditors determine what you can afford to pay. You may not know how long it will take you to back to your regular payments, but be ready for that question as well.

Call the creditor, making a note of who you talk to. Explain your situation and state your need for a payment reduction.  If you are not happy with the way the call is going, call back and speak to someone else. 

Do not agree to pay more than you can.  Remind them you have two options; the amount you can afford to pay, or not making any payment and giving that money to another creditor.  When a payment reduction agreement happens, get it in writing.  Or, you can send the basics of the agreement in a letter CRRR to the person you spoke to and keep the receipt with the letter. 

Make late fees, interest rates and negative marks on your credit report part of the negotiation and written agreement. Once the agreement is in place, notify the creditor if you cannot make a payment telling them a health expense or something has had to take precedent that month.  Continue to communicate with them in difficult times.
If you are uncomfortable doing this on your own, you can try getting a payment plan using a credit counselor.  Some credit card banks may tell you they only work with account holders in arrears through credit counseling agencies.   Either way, call up each of your creditors and find out what, if any, credit counseling organizations they work with.  Then you will know which ones to contact.

Thoughts about Settling Your Credit Card Debt on Your Own

For most people settling their credit card debts themselves or with the help of a reasonably priced attorney is their only financially viable debt settlement alternative.  Reading this and accessing the resources presented here will give you the tools to settle your debts.  According to Charles Phelan, a debt settlement expert and coach, creditors routinely settle directly with consumers, and in fact PREFER to deal directly with the consumer without any third-party intervention. You can settle your debt at any time, he explains. If a collection attorney has validated the debt with impressive documentation and is about to file suit, or has filed suit, you can still offer to settle for cash as opposed to a payment plan.

What is your debt settlement goal?  What do you want to accomplish with your credit card banks?  Do you want to get your payments reduced without paying penalties or more interest and without damaging your credit score?  A lot of the banks advertise that they are willing to work with account holders in these difficult times.  Perhaps you should prepare to plead your case and investigate that avenue with your credit card banks.

Federal Reserve regulations that prevent credit card banks from raising interest rates on current balances take effect in 2010.  If your credit card bank has raised your interest rates, perhaps a phone call pleading your case (see getting your story straight below) asking them to back off, would work.  Most people do not bother protesting.  Your plea could work.
Are you motivated or forced to pursue more hard-ball balance reduction debt settlement negotiations than interest rate reduction?  Everyone who has trouble paying their credit card accounts and wants to preserve their good credit has considered settling their debts with their credit card banks.  If that describes you, to succeed you will need:
1) Sufficient assets to make reduced-balance lump sum payments
2) The fortitude to stop paying your credit card account or accounts for four to six months and the self-discipline to put that money aside for lump-sum-payment settlements.
3) Sufficient income to be able to bank a lump sum settlement amount with those missed payments.
4) A plausible story for the original creditor as to why you can’t pay and why you need to settle for reduced-balances.

If you have little or no income and few assets, debt settlement is not for you.  You need your income and assets for monthly living expenses.  Setting up monthly debt settlement payment plans is not for you either.  You will need your money to cover basic needs; food, shelter, utilities, clothing, healthcare, education, etc. Third, you will need to decide:
1) To learn how to negotiate with your credit card banks and debt collectors and settle your own debts; or . . .
2) Whether you can afford to pay an attorney to handle the negotiations and settle for you, or for a small retainer, to act as your “bankruptcy” attorney.  “Bankruptcy” means you refer any creditors or debt collectors who will not settle with you to your “bankruptcy” attorney to demonstrate your are seriously considering that option and to stop their collection calls.

As I covered in the Debt Services chapter, signing up with a debt settlement/negotiation firm is not an option.  If you are a perfect candidate for debt settlement, that is you have enough income, but not too much, you cannot afford to pay them as well as pay your creditors accumulated lump -sum payments.

As with the other aspects of credit card debt, each account(s) holder’s situation is different.  You will need to consider:
1) The amount of your total debt and how it is spread among creditors;
2) Who your credit card banks are and what their reputation is for settling.
3) Your financial profile and how you make a case for the bank to settle with you.
4) Whether you are dealing with the original creditor or their designated collection agency, which will depend on how many months you’ve withheld payment and if the account has charged off.

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