Thomas K. McKnight - Bankruptcy Lawyer
The Basics of Debt Settlement
Debt settlement is an agreement between a lender and a borrower for a large, single payment towards an existing balance in return for the forgiveness of the remaining debt. Somebody who owes $10,000 on a single credit card, for example, might approach the credit card company and offer to pay $5,000. In return for this one-time payment, the credit card company agrees to forgive or eliminate the remaining $5,000 still owed.
Why would a credit card issuer voluntarily choose to forgo a sizable amount of the balance it is owed? It is usually because the lender is either strapped for cash or is fearful of your ultimate failure to pay off the entire balance. In both situations, the credit card company is trying to protect its financial bottom line-- a key fact to keep in mind as you start negotiating.
Credit cards are unsecured loans, which means that there is no collateral your credit card company-- or a debt collector-- can seize to repay an unpaid balance.
While negotiating with a credit card provider to settle a balance might seem too good to be true, it's not. Not surprisingly, lenders don't like to promote settlement, and although there are no independent statistics regarding success rates, the Federal Trade Commission (FTC) estimates that roughly fifty percent of debt settlement cases make it to completion. Still, if you're severely behind on your payments and spiraling toward bankruptcy, your lender might be willing to take what it can get, offering you one last chance to get back on your feet.
The Negotiating Process
Begin by calling the main phone number for your credit card's customer support department and asking to speak with someone, ideally a supervisor, in the "debt settlements department." Explain how urgent your situation is. Highlight the fact that you have scraped a small amount of cash together and are wanting to settle one of your accounts before the money gets used up somewhere else. By stating the fact that you have multiple accounts on which you're seeking debt settlements, you're more likely to get a competitive offer.
Offer a specific dollar amount that is approximately 30% of your outstanding account balance. The lender will most likely counter with a higher percentage or dollar amount. If anything above 50% is suggested, consider attempting to settle with a different creditor or just put the money in savings to help pay future monthly expenses.
Lastly, as soon as you have completed your debt settlement with your lender, be sure to get the agreement in writing. It's not uncommon for a credit card company to verbally agree to a debt settlement just to hand over the remaining balance to a collections agency. Guarantee the written agreement clarifies the amount you have to pay in order to have your whole balance excused from additional payment.