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Chapter 5: Credit Card Debt Settlement

Getting Your Credit Card Debt Story Straight scroll down

Basic Debt Settlement Strategy

The basic debt settlement strategy for original creditors used by those who use an attorney or do it themselves is;
1) Stop paying your credit cards and put the money in the bank to make lump sum final settlement payments later;
2) Respond to your creditors’ collection efforts with a tale of woe as to why you cannot pay;
3) Be prepared to back up your story to the original creditor with specifics;
4) Wait for the original creditor to make a settlement offer as the account approaches the six month charge off date;
5) Then counter with a lower offer and negotiate the best deal;
6) Negotiate a favorable listing by the creditor on your credit report.  For example, Paid in Full (PIF) is better than Paid as Agreed which is better than Settled which is better than Charged Off.  Getting the listing removed is the best option.  That is called pay for deletion (PFD) as in you paid a lump sum to eliminate the debt and its listing on your credit report. PFD does not appear on your credit report.
7) Keep records.  Get the first and last name of each person you speak to at a call center. Record the dates of your or their calls.  Put everything in writing and get it signed by an authorized manager at the credit card bank before paying the lump sum.

The credit card banks have easy access to your credit report and for a few dollars more they can access most of your personal information, where you work, what your home is worth, how big your mortgage is, your car payment, etc.  Lying about or exaggerating the direness of your situation is not going to work.  Approaching them to settle you credit card debt while you are still current is not going to work either, but as the charge-off date of your account approaches it becomes good business for them to not write off the entire debt amount.

In many cases, perhaps most, a holder of multiple credit card accounts cannot afford to settle all of those debts before charge off.   That means they are faced with settling with the collection agency assigned to the debt after its charge off.  The bank still owns the debt, and they will be paid a commission based on what they collect. In some corners you can read that negotiating with the collection agency is more difficult than the bank because they want more money since they are only getting a percentage of it.  While in others, the word is to settle with a collection agency (CA) about six months after charge off.  That is approximately the time that the debt could be sold to a junk debt buyer (JDB), meaning the collection agency would lose it and get nothing.  At that point, the collection agency, just like the bank right before charge off, would prefer something over nothing.  The bank, which has to sign off on the settlement, would also prefer 15 or 30 percent over the 10-12 percent it will get selling the debt to a junk debt buyer. 

Then the question becomes, why not wait to settle all debts with the collection agency?  The answer depends on whether you can get 20-30 percent from the bank right before charge off.  Also, if the collection agency turns out to very difficult, go back to the original creditor who still owns the debt and tell them you would like to negotiate a settlement with them. Tell them the collection agency is being difficult.  In some cases, they may override the collection agency.  In addition, after the collection agency gets the account, it is always a good idea to go the bank first and find out if they will negotiate directly with you and cut out the collection agency.  Also, BEFORE negotiating with the collection agency, verify with the bank that they are THE entity to be negotiating with.

Don’t let a collection agency intimate you.  Get off the phone if they start getting nasty.  Don’t let a collection agency con you with fees and penalties they have added on to pad their profits.  Negotiate with them from the original balance.

Getting Your Credit Card Debt Story Straight

For many people, unfortunately, the truth about a lost job, catastrophic illness or death in the family is the truth and will work well with the bank.  For others, who will be fine (at least well enough to pay their bills) if they keep their job, the debt settlement picture is clouded.
The most common approach is “I am considering bankruptcy.  This is my last attempt to settle my debts.”  The bank will be looking at your credit report.  Be ready to explain items on it.  Will they find that you are not late on any other payments?  If so, that does not seem like the credit report of someone on the verge of bankruptcy.

You need to sell the bank on your desperate situation.  In bankruptcy they will probably get nothing. With the new bankruptcy law, the creditor has to guess as to whether you will qualify for Ch. 7 or be forced into Chapter 13.  At best, under Chapter 13, where payment plans are typically worked out, it will take the creditor 5 years to recover the 35-50 percent you’re willing to settle for now.  Under Chapter 7, the creditor will receive nothing. These are the questions the bank representative will ask you:

• What is your monthly income and expenses?
• Are you employed?
• If not where were you employed?
• When did you leave? 
• How much were you making?
• What are you monthly expenses?
• Give examples of or itemize your expenses.
• What do you spend for food each week?
• What do you spend for utilities?
• To justify a debt settlement, you should show more expenses than income.
• Have you been considering bankruptcy? Why? For how long?
• Where are you getting the settlement’s lump-sum payment from?
• Is it a loan?  . . . from a friend? . . . from family?
• [Do not mention a home equity loan, if you have one.]

If you have little money and few assets, you have nothing to lose being open and honest.  If you have assets, but currently cannot pay your bills, you may want to respond to requests for personal financial information questions with, “I am not willing to share that information with a company that could end up suing me someday.”

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