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Credit Card Debt Settlement: Tips for Negotiating

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.

Image source: Flickr

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4 Responses to Credit Card Debt Settlement: Tips for Negotiating

  1. Ann says:

    instead of this route is it best to do a debt mgr. co. I’m doing this now with Money Mgr. I just wonder if its a good one and after the date yr they give you is your last payment is your card pd in full. I ask a lawyer an his advise was to file bankrupt an that’s not what I wanna do but he said “not sure these companies are legit. are they

    • Tracy East says:

      Ann – this is a great question! There are a lot of options when it comes to getting help managing your debt, and the options can sometimes seem confusing. If bankruptcy doesn’t seem like a good option for you, it might be wise to get a second opinion from a non-profit credit counselor who can go through a detailed look at your household budget with you, and discuss all the options that fit your situation. Everyone is a little bit different, and there isn’t a “one size fits all” approach to handling debt. Let us know what you decide to do – best of luck!

  2. Valerie says:

    I was just served with a summons from a credit company on a $6000 debt that I owe. I need some help with putting a letter together to explain my financial hardships from last year and offering a settlement of $3500.00 (in pymts of course).

    • Tracy East says:

      Hi Valerie – we are not able to handle Debt Settlement Services. Best of luck handling the situation with your creditor.

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