If you are having serious financial difficulties and aren’t able to pay all your debts, it may be worthwhile to negotiate a credit card debt settlement. Settling your debt shouldn’t be the first choice for addressing debt, but it can allow you to avoid bankruptcy and also lets your creditor recoup some of your balance. Follow these tips to negotiate a settlement that works for both you and your creditor.
Figure Out What You Can Afford
Before you call your credit card company or bank to negotiate, determine how much of your credit card debt you are realistically able to pay. A settlement doesn’t help you if you have to borrow more money to pay it. In addition, you don’t want to agree to a settlement that would leave you without enough money for rent or food.
Explain Your Situation
Once you know what you can afford, call your credit card company or bank and explain the circumstances that have made you unable to pay your full debt. Also, tell your creditor what you’re doing to come up with money, such as selling valuables or working a second job. This is necessary because if the company suspects that you are not really in financial trouble or not making an effort to meet your obligations, it won’t be willing to negotiate with you. Providing this information lets the company see that you are truly on the verge of bankruptcy but trying to pay what you can.
After explaining your situation, ask for a settlement that you can afford.
Ask for Better Terms
The company may only agree to settle part of your debt or may refuse to settle at all. If you’re unable to settle as much as you hoped, ask if you can have more time to pay the remainder or a lower interest rate. If your creditor consents to giving you better terms, paying back the rest of your debt will be somewhat more manageable.
Understand the Effects of Settling
When your creditor grants you a credit card debt settlement, make sure you understand how it will affect you. Clark Howard of CNN notes that you will owe income taxes on your debt settlement if the portion of the balance that your creditor forgives is more than $600. Also, the bank or credit card company may inform the credit bureaus that you have settled your account, which can lower your credit score. Ask whether your creditor will give a negative report to the credit bureaus so that there won’t be any surprises the next time you apply for a loan.
Remember that your settlement isn’t binding without a written record. After you’ve followed these tips to negotiate with your creditor, wait to receive a copy of the agreement in writing before you pay.
Lastly, if debt settlement has you concerned about tax implications or your credit score, it may be worthwhile to speak to a credit counseling agency to explore other options that may fit your situation better.
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