Credit Card Settlement: Understanding the Process & Outcomes

Successfully negotiating a credit card settlement can have some benefits for you financially, but it has a few drawbacks as well. Here are the basics of a typical credit card negotiation settlement and how it works. 

How it Works

The process of negotiation begins when you rack up a large credit card bill that you can not afford to pay. Once you let the account become delinquent, you will begin to accumulate several late charges. At that point, the credit card company starts to call you and send you letters. They ask for you to pay the bill immediately and notify you that your account is delinquent. They may also use a debt collector to attempt to collect the debt from you as well. 

At that point, you can attempt to settle the matter through negotiation. You talk to the representative from the credit card company, or the debt collector. You can hire an attorney to do this for you if you feel uncomfortable doing it yourself. From there, you try to come to a solution between the two parties. They may offer you an amount that they will take for a cash settlement. They may also offer you terms to get on a payment plan with them and pay off the debt over time.

Once they make an offer, you can counteroffer and see what they do. Depending on how badly they want to settle the account, they may take the offer or they may only leave their initial offer on the table.

The Agreement

Most of the time, the creditor will agree to take less money than what is owed to them. Many times, it will be significantly less than what you originally owed. It is a very common practice to settle for less than half of what you owe on a credit card bill. This can save you a large amount of money.

In return for the savings, the credit card company will require that the account be closed and will not be reopened for a certain period of time. They will also require you to adhere to the payment terms in order for the offer to be valid. If you agree to a lump sum payment, it will only go into effect when you send in the money.

When you speak to the card representative, be certain that you get everything in writing. You want to be sure that you are both in agreement of the same things and nothing will be changed at a later date.

Impacts

The biggest drawback is that it will hurt your credit history. The credit card company will report the account to the credit bureaus as "settled," instead of fulfilled. This negative credit rating will impact your future ability to open credit cards or take out loans.

Another drawback to this method is that you will have tax liability for the debt that was canceled. The creditor will send you a 1099-C form and report the cancellation to the IRS. This means that you will be responsible for the taxes that are due on the money, even though you did not actually receive any money.