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 If you've run up the balance on your credit cards and paying back the entire balance seems impossible right now, you might want to consider credit card debt settlement. In a nutshell, this type of arrangement is not for those of you that just don't feel like paying for all those things you've bought recently and charged on your card. Negotiating with you credit card company is only to be used as a last resort - here's why.
How to Settle Credit Card Debt
Once you've approached your credit card company about a repayment problem, they are immediately on alert that you are now a credit risk. This can have some pretty negative consequences when it comes to future credit. That's why you only want to approach a company if you're thinking that bankruptcy might be in your future and settling some of your debt now might be your only way of avoiding that option in the future.
We're going to try and provide some information that will help you steer clear of potential problems by explaining how to settle your credit card debt in an equitable / fair manner.
Debt Settlement Services
There are many companies that offer debt settlement services. If you approach a company for this kind of service, do yourself a favor and try to make decisions with your head and not because you think it's your only way out.
Credit Card Problems
A lot of people with credit card debt problems often wonder if they're really eligible for a debt workout arrangement or settlement. The key to eligibility is really in the hands of the credit card company - or at least providing them with the right information so they can make an informed decision.
Credit card companies are expert at managing risk. They do it all time because they are in the business of extending credit to people that might decide they don't want to pay or no longer have the resources to pay their outstanding balances on their credit cards.
Forgiving Credit Card Debt
So when faced with a situation where someone is not paying their credit card bills on time, or has stopped paying altogether, the credit card company is at a cross road. They might decide to pursue the amount owed with all the resources they have at their disposal - but this is a costly option if they do not get paid.
They could also go down another road, which is one that forgives a portion of the debt, if they think it is more likely that they will only be able to collect on the lower amount. Like all businesses, the credit card company wants to maximize their profits. They can collect all the money owed, none of it, or a portion of it. Their risk assessment will dictate what course of action they take, but they realize that even getting half of the money owed is better than getting none of it. After all, bankruptcy is really in no one's best interest.
So the answer to the question about settlement eligibility boils down to this simple idea - if you can present the credit card company with enough facts to convince them you cannot pay the entire amount, then you're a good candidate for debt settlement.
Credit Cards and Bankruptcy
Although the bankruptcy law changes are now in affect, this process is painful for both the individual declaring bankruptcy and creditors. If you want to convince your creditors that you are faced with this difficult decision, then you have to convince them of three things:
- You're unable to make payments on outstanding debt, as demonstrated by recent payment patterns.
- You don't have a lot of assets to lose, such as a home or a car, if you decide to declare bankruptcy.
- You don't have enough income to justify a reorganization of debt, such as would occur in a Chapter 13 proceeding.
That second point is important because if a credit card company believes they can get paid by liquidating your assets via a bankruptcy proceeding, then they just might let you go down that route. So if you've got valuable assets, bankruptcy might not be a wise choice.
Information Gathered By Credit Card Companies
When you fill out your application for a credit card, it is very likely that you authorized that company to collect and inspect your individual credit report. If you start to run into problems and approach your credit card company, one of the first things they will do is to pull your most recent credit report and examine your credit history.
By pulling your report, the credit card company will be able to see if you are staying current on your payments to other creditors. So if you have five credit cards and you're paying back money on all but one card, they'll know you're probably able to pay them also. However, if you haven't been paying anyone, or appear to be struggling to make any or all payments, then they may realize the situation is serious.
Exposure of Assets and Income
When you first applied for a credit card, you also provided some information on assets - such a bank accounts - and income. Buy many years may have passed since you applied for a credit card or your individual situation may have changed since applying. Depending on where you are with respect to settling this debt, the company may ask that you provide proof of income or assets.
Typical Debt Settlement Terms
When it comes to typical debt settlement terms, there is a simple rule of thumb that applies. Credit card companies will settle at a point where they feel the least financial pain and can be reasonably assured that you will successfully struggle through your new payment arrangement.
Example Credit Card Settlement
That being said, many credit card debt accounts settle in a range of 30 to 70%. This is a logical range of settlement if you understand the risk the credit card company is taking on. On the one hand, if they think you can pay 90 or 95%, then they would probably not be open to the suggestion of a settlement in the first place.
On the other hand, it would be rare for a credit card company to settle in a range that was less than 10%. At that point, they're getting next nothing because bankruptcy looms large. So why not just ask for as much as they can get before you go into bankruptcy?
Credit Card Debt Settlement Timeline
Normally, you can expect to settle your debt with a timeline of three to nine months. If one of the parties wanted to expedite the process, it could be accomplished in as little as a month or so. By the same token if someone wanted to stretch out the timeline, or stall, things could drag on for a year or more.
Payment or payback timelines are another matter altogether. Unless bankruptcy is your only option, it is normally in the best interest of the debtor to make the process as short as reasonably possible. There are several reasons for this:
- After reaching a settlement - even at a lower value than originally owed - the credit card company will still be charging you interest on the outstanding balance. So you don't want to pay that 18% rate (an example rate) any longer than necessary.
- The longer you try to things stretch out, the more likely it is that the credit card company will throw up their hands and attempt to settle your account in court.
- After going through debt settlement, most individuals want to get the whole experience behind them, including the rebuilding of credit. Until you've got this deferred payment arrangement successfully behind you, you're perceived by all creditors as a credit risk.
Credit Ratings and Debt Settlement
The exact impact that debt settlement will have on your credit rating really depends on where you are starting from. If you've got a poor payment history already, chances are your rating is not very good to start with, so going into debt settlement might just lower your rating from bad to poor.
On the other hand, if you've been paying all of your credit card and other bills on time for years but suddenly fall on hard times, you may very well be going from a consumer with good credit to poor. Unfortunately, this means that debt settlement is a much more difficult decision for those with a good credit rating before the trouble started. If you're the one paying your bills, then you probably have a pretty good idea of where you're starting from and therefore what the impact any settlement will have on your credit report.
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