Credit card debt settlement involves satisfying your credit card debt by paying less than you really owe. Credit card debt settlement ranks low on the list of desirable debt solutions, but it’s one that some people must use to pay off debt and avoid bankruptcy.

How Credit Card Debt Settlement Works

There are two methods of credit card debt settlement: through a credit card debt settlement company or on your own. Credit card debt settlement companies should be avoided. They collect your payments for months before making a settlement offer – if they make an offer at all. Meanwhile, you continue receiving collection calls and negative payment marks on your credit report. You’ll get better and faster results settling debts on your own.

Credit Card Debt Settlement Payment Amount

Before you can settle your credit card debt, you have to decide how much you can pay. Credit card debt settlement can typically be done for 10% to 60% of the outstanding balance, depending on the creditor and age of the debt. The more delinquent your account, the lower the amount creditors are willing to accept to satisfy the debt.

Lump-Sum vs. Multiple Payments

You pay in one of two ways – multiple payments over time or a single lump-sum payment. Creditors prefer a lump sum or few payments (like 2-3) and are less likely to agree to a settlement that has to be repaid over several months. Figure out how much of the debt you can pay immediately and offer that. Once you’re negotiating with your creditor, offer an amount lower than what you’re actually willing to pay. That way, you have some wiggle room if your creditor wants to negotiate up.

Negotiating a Credit Card Debt Settlement

Once you have a credit card debt settlement offer, call your credit card company and to talk to a manager, someone in a loss mitigation, or similar department. The customer service representatives you first speak with are usually not authorized to take credit card debt settlement offers and you will always be told “no” when they couldn’t say “yes” if they wanted.

During the call, make sure you write down the name, phone number, and extension of the person you talk to. Also record the date and time of the call and the outcome. Don’t give up with a single phone call. You may get different and often conflicting answers from different people at the same creditor and sometimes even the same person on different days.

Credit Card Debt Settlement Watchouts

Your credit card company might close your credit card after settling your debt. That’s if your credit card hasn’t already been closed. You could also have your credit limit reduced or eliminated all together once the creditor realizes you don’t plan to pay the balance in full.

Credit card debt settlement typically requires you to be a few months behind on your credit card payments. At that point in time, your credit score will take a severe hit. The effect will be worse if you’re late on more than one credit card.

The federal government requires you to pay taxes on cancelled debt, including debt that’s been cancelled through credit card debt settlement. The bottom line, you owe the federal government more money which means you’ll get a smaller refund check or owe more money to the IRS.

Finalizing Your Settlement Offer

Final credit card debt settlement agreements should be in writing. Either draft an agreement of your own or have your credit card company send you an agreement. Make sure you and someone from your credit card company have both signed the agreement before you send payment.

Whether you’re seeking out an organised debt management plan or you’re trying to resolve your debt problems alone, one of the most important things to do is to prioritise your debts. If you have debts from multiple creditors, deciding which ones are the highest priority can be difficult.

Here are the highest priority debts you should look to clear as soon as possible.

Mortgage or Rent Arrears

The simple fact of the matter is that if you fail to pay your rent or mortgage, you could lose your home. With mortgage arrears, you could even face legal action and the lender you take possession of your home. With mortgage arrears, your landlord could evict you, leaving you without a home and still owing the money. As soon as you find yourself in any difficulty meaning you cannot afford your mortgage or rent, you should contact your lender or landlord as soon as possible and explain the situation fully. Treat this as a high priority payment.

Tax, National Insurance and VAT

Failing to pay tax could lead to bankruptcy and potentially even criminal proceedings against you. This is certainly a high priority debt.

Council Tax

Again, this is a debt that should be considered high priority, as failure to pay could result in legal action against you. Hire Purchase Agreements on Essential Items. While hire purchase payments against non-essential items should be considered low priority, essential items that require a monthly payment should be high priority. Examples include a car that you use for getting to work. Any item where losing it will inhibit your ability to go to work or to live is an essential item.

Gas and Electricity

Gas and electricity companies have the right to cut the supply to your home if you fail to pay and as such this is again a high priority bill. Of course you should pay your water bill as well – though water cannot be cut off and as such should be treated as a lower priority debt.

The final problem with credit card purchases is directly related to a more emotional dimension of these purchases — debt. Americans are accumulating record amounts of debt at breakneck speed, perhaps because of the overabundance of great credit card offers. Credit card companies love to target college students, because they know that college students are notoriously poor and unrealistic. If these companies can “help” college students to spend money that they don’t yet have, they can be assured of monthly payments, and better yet, they can freely raise APR rates when those payments don’t come in on time.

These companies can also train young people to live by a debt mentality, so that even if they can get out of debt at certain phases of life, they will inevitably fall back into debt when the lure of certain items becomes too much for them. If you train people to buy more than they can afford — or to live by “soft,” unrealistic numbers instead of limited resources — you can keep them in a continual position of dependency.

Ideally, before you make a credit card purchase, consider the emotional and economical costs of the purchase. Ask yourself how you will feel after you purchase the item, after you bring it home and begin to grapple with its real cost. This simple question can prevent purchases that may cause regret over the long haul.

New data published by the Council of Mortgage Lenders (CML) indicates that the number of home repossessions has fallen by 1%, from 9,100 in the first quarter of the year to 9,000 in the second quarter. However, some people in the industry have warned of an “arrears timebomb”, with disaster set to strike when rates rise in 2012.

Compared with the second quarter of 2010, the latest repossession figure represents a 7% fall. At this stage in 2010, there had been 19,500 repossessions, compared with 18,100 so far this year. The number of mortgages in arrears of 1.5% to 2.5% has increased, however.

Paul Smee, director general at CML, said that the stabilisation of mortgage repayment problems could be attributed to “stable employment and low interest rates.” He added that he felt there was no need to revise current forecasts in light of the current uncertainty in the global financial markets.

The Citizens Advice Bureau has reported that it has dealt with over 100,000 cases where people are in mortgage or secured loan arrears, and says that it has prevented 5,000 people from losing their homes in the past year. Gillian Guy, chief executive at the CAB, said: “With the cost of living going up daily and incomes lagging badly behind, mortgage lenders and the government must focus on helping people stay in their homes. Repossession is a terrifying prospect and should always be the last resort.”

If you do fall behind with your mortgage payments, you should always treat them as the top priority before paying back any other debts. Otherwise, you risk losing your home. Always contact your lender if you are expecting to miss a payment, rather than waiting for them to start threatening you with legal action. They may be willing to reduce your monthly payments in some circumstances.

Additionally, you should ensure you are receiving any benefits or tax credits to which you are entitled. The Government also operates a Mortgage Rescue scheme, through which you be able to sell your home but continue living there and paying rent. You can get more information on this from your local council.

If you are struggling to repay unsecured loans, credit cards or overdrafts, we can provide confidential debt advice.

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