Your Bailout: Slash your Credit Card Debt
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As the credit crisis winds toward its inevitable conclusion, the number of customers unable to pay off their credit card each month is swelling. And credit card companies, facing the very real possibility of customers defaulting entirely, are now willing to come to a settlement for substantially less than the amount owed. With the credit card companies ready to deal, here’s what you need to know to get your own personal bailout.
Credit Cards are Unsecured Loans
Credit cards are a form of unsecured loans. What does this mean in layman’s terms? An unsecured loan is a loan in which a borrower is not required to use an asset as collateral in order to receive credit. In contrast, secured loans (mortgages or auto loans, for instance) use collateral that may be repossessed should the borrower default on their payments. By the nature of their business models, credit cards and other forms of unsecured loans typically offer shorter payback terms and higher interest rates.
Bailouts for the Delinquents?
With the recent rise in unemployment and wage cuts, credit card debt delinquency has significantly increased and shows little sign of slowing down. So what’s a credit card company to do? Bail you out! If you fall into the delinquency camp, there is a good chance that you may be able to negotiate an agreement with your card provider to pay off a portion of your debt in exchange for them wiping out the rest.
Increasingly, consumers are reporting that they are getting offers from their card providers to wipe out debt in exchange for payments. Few creditors are admitting to the practice. American Express and Bank of America admit to deciding on a case-by-case basis whether to accept partial payments. Other companies are keeping their lips shut, but their trade group, the American Bankers Association, acknowledges that settlements are becoming more common.
What not to do
Let’s be 100% clear. If you are NOT delinquent on your debt, it would be extremely bad practice to purposefully go into debt in the hopes to get a free ride and have your debt wiped out. There are no guarantees that any company will wipe out your debt, and the risks and costs associated with trying to pull this trick off are simply not worth it.
If you are delinquent, it would be equally as risky to go on a spending spree in the hopes that your debt will be forgotten. Be smart and ethical. Debt settlements can still show as a black mark on your credit history, and this is bad news for you. Debt settlement should be resorted to only at last option.
How to Settle your Credit Card Debt
You’ve done everything you can to get out of debt, but just can’t seem to dig out of the hole. Your only option is to settle. There is no exact science to settling debt with every credit card company, and a lot of your success will come down to your negotiation skills. This is tricky business and if you’re in doubt, you may want to consult with a lawyer or certified financial professional. Here are some suggestions if you’ve decided to go down this path based on stories that we’ve heard from others who have succeeded.
- Stop making payments: if you’re paying off at least a portion of your debts, why would the credit card company have any reason to settle with you? Wait at least 60 to 90 days prior to making an offer.
- Build enough cash to offer a settlement: at the same time you’ve stopped making payments, you’re going to have to have money on hand to make an offer. Perhaps you sell some of the luxuries that got you into this mess in the first place or get a second job.
- Make your first offer: explain your situation and make an offer. 25% is a good starting point. The credit card company is probably not going to accept your first offer, so it’s good to start low. You may get a counter offer at this point – but be patient in your negotiations.
- If you increase your offer, ask for more: ask for any black marks on your credit report to be removed in your negotiations.
- Get it in writing: get your agreed upon terms in writing from the credit card company.
- Make your payment: pay by money order and send via certified mail so that you can verify that you fulfilled your end of the agreement.
- Tax significance: you will get a 1099 from your credit card company and must claim the forgiven amount as income on your tax return.
- Learn from your mistakes: if you can’t get your credit history wiped clean, the ‘debt settled’ mark will stay on for seven years past settlement. This will result in you having difficulty getting good credit terms during this time. Learn from your mistakes so that this does not happen again.
For more of GE Miller’s writing, visit personal finance blog 20somethingfinance.com.
Here’s Mint’s credit card guide and credit card calculators to help you manage your credit.
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25 Comments so far
leave a commentRemember there is a difference when settling with a third party and dealing with the bank. If you have stopped making payments for more than 90 days it is extremely likely that the bank sold your debt to a third party collection house to try to collect. That is when you start getting letters with weird company names on the letter head. I recommend you settle with that new company if favorable because they can maintain normal processes to make sure it is properly handled with the credit bureaus. Settling with the bank while the “paper” or debt is no longer in their possession can cause headaches later if they do not clear it off your credit report properly. I also recommend waiting until the last two or three days of each month since the collections companies always work with great pressure to reach quotas. They will be the most flexible towards the last day of the month. In my experience 60% settlement is easy to get and settling for less than thattakes devious negotiating skills. Don’t play hardball that just makes them angry, play dumb but actually be wise. Don’t say this ” I refuse to pay any more than 45% for this debt, it is unconscionable!” instead say something like this over and over again, ” I just can’t afford anymore than $$$$, I don’t have anyone to turn to”
Intentionally refusing to pay a fair debt is no different morally than theft. Do you think the giant mega credit card companies absorb that cost? No, they pass it on in the way of higher fees and interest rates to the rest of your fellow consumers, that’s us. If you’ve lost your job or have had other life altering circumstances, I’m not talking to you here, declare bankruptcy if you have to. If you are a spend-a-holic and are looking to cheat the system, shame on you, you thief. Cut up your current cards, get a second job sweeping floors or flipping burgers and live life like a responsible adult.
I don’t think delinquents should get bailed out. They should be sent to jail.
You could also use a debt settlement company. I’ve had a good experience with cleancreditgroup.com. They settled my debt faster than we agreed on and actually ended up paying less. They also claim to be the cheapest in the industry (not sure how true that is though).
I understand the reasoning why people would try to get their debts reduced, but I have a few points that kind of bother me about doing something like this. First, regardless of the predatory practises of the credit card companies, paying your debts is the right thing to do. Unless I was in serious trouble, I would not feel right about trying to negotiate like this to try and reduce my debts. I tend to like to solve my problems on my own, and I try to avoid asking for help, “I got myself into this, I should get myself out.” It is also important to keep in mind, as was said in this article, that a deed like this will likely stay with you for the next seven years. Do you think you’ll need an auto loan in that time? Will you be applying for a mortgage? It might save a few dollars now, but it will cost you then. I guess it all depends where you are in life, and what you expect to need during the next seven years. If you really set your mind to it, people can achieve great things. If you’re familiar with Get Rich Slowly, the guy that writes that blog has mentioned that he repaid $30,000 in debt in less than three years, and I believe he said that he made about $42,000 a year.
I lost my job and can barely pay utilities and pay for food. There are no jobs. I’m scraping by. I hope to God I can recover. please pray for me, as I really am trying. It’s nuts out there.
peace,
CSF
Settlement is only appropriate if you have a legitimate hardship. People shouldn’t blithely capitalize on this process- it’s like a bankruptcy, you use it as a last resort. If you have a divorce, if your income shrinks, if you accrue insurmountable medical bills- then maybe it’s appropriate. Otherwise you’re crippling people who actually do need debts forgiven by making creditors wary of anyone who appeals to this sort of process.
If you do need this sort of thing, make sure the organization is accredited by the BBB and TASC. I have had two friends use Financial Resolutions (www.resolutionslifemoney.com), but they won’t work with everyone. Tim probably had the same experience- a company that doesn’t if someone needs that sort of service just isn’t reputable.
It’s not easy. And it is definitely not right for everyone. But it is effective.
If you aren’t sure you need to do this, you don’t need to do this. Use a consumer credit counseling service instead.
P.S.: Be careful doing this without some assistance- you can get sued really easily that way.
If I had to slash credit card debt, I would contact Slash, the famous guitarist. I would just say “Slash! my credit card!” and he would take care of it.
Hey wikibuddha,
Did your mother not hold you when you were a child. making a comment likeI dont think delinquents should get bailed out and should be sent to jail shows how ignorant you are. No offense
But…
What about death, divorce, illness, job loss. Do you think theese people should go to jail?
What our USA needs is to get wallstreet out of lending so this doesnt happen again with b paper loans and greed.
You can take that to jail, Opps I mean the bank:o)
I would have emailed this comment to the author but did not see that option.
Just an observation: “You’ve done everything you can to get out of debt, but just can’t seem to dig out of the hole. Your only option is to settle.” This seems clumsily worded (at best), or an irresponsible piece of advice (at worst). While the options that can face folks who have had a job loss may be ugly – having to choose from a set of bad options – it is incorrect to say that the only available option is to settle.
Talk with a non-profit financial counseling agency that will discuss all options, including pros & cons, including settlement on your own, debt settlement companies, credit counseling/debt repayment programs, ways to work with your creditors, bankruptcy, and the consequences of just stopping paying on your debts – as well as the types of (possibly difficult) changes to lifestyle, including income & expenses, that could help make things work. Then you can make a balanced and informed decision about how to proceed.
A good place to start is http://www.nfcc.org to find an agency near you. Good luck!
milwakee -
I went to http://www.nfcc.og twice, and explained my situation. They did not discuss ‘all options,’ but referred me to a debt management agency. They would not suggest any other alternative as viable. Have you had a different experience with them?
For those of us with very little income and mounting debt, the author presents a real alternative to bankruptcy.
Thanks @ Justin Dux for the additional advice.
@Responsible Adult – We like to consider ourselves responsible too. We had almost 0 debt 6 years ago, but had to fall on our credit cards to help support our family of 4 while my wife finished Pharmacy school. We figured her PharmD degree would be our “ticket” out of debt when it was al said and done. In reality her school loan payments are almost as much as our mortgage. Our mortgage is more than the value of our house (we own a modest 2br townhouse, not a McMansion). Our credit card companies kept increasing our interest rates to the point where we could no longer afford to make extra payments. We make too much to benefit from for bankruptcy proceedings, but not enough to meet our bills. We want to pay off our debt and accept responsibility for what we borrowed to keep us afloat so many years ago. However, even living extremely modestly (both cars are over 10 years old and we make no payments on them, we have no cable/satellite service, in fact we have no TVs in the house at all, and our kids go to public school) we can’t afford to make payments to the credit cards any more. We are going to have to settle at some point, so we thank Mint for posting this advise. Don’t judge a book by it’s cover as the saying goes.
As the economy continues to struggle and the banks and other financial institutions (like credit card issuers) get government bailout money, more and more places are going to seek out people to offer them a settlement. Why? They want to make some money off the loans instead of getting nothing. These financial institutions know they are raising rates like crazy and that means more people will run into default. They want to make some money off those in default, so they settle. IF you settle, you have to know they consider that money “forgiven” and therefore you have to pay taxes on it. There is a tax break because of all the foreclosures though for the years of 2007 to 2010 I think. Also, if you don’t settle, you have about 1 to 2 years before they send the case to a lawyer to try and seize your income. There are ways to fight this. If anyone is interested, let me know and I can dig up the process for fighting this in court. Most times you can win against a lawsuit of this nature. Like some of the other posters on this discussion, we would all rather just be in a place to pay off all our debt instead of having to settle or file bankruptcy. I found a great site for getting out of debt I love to share with people becasue it is so unique. It is http://www.money-cocktail.com and they talk about budgets failing because it doesn’t match the “money personality” of the person. They also have great resources for getting out of debt fast, even paying off your mortgage in like 9 to 15 years. They have some great suggestions and great resources if anyone would like to check them out.
This is a really great article. Lots of good pointers for people, more than I see in most posts. I was actually quite successful at negotiating settlements on my credit card debt. I reduced $212,000 to $30,000 and had over $100,000 in debt written off. One thing I can tell people is that you must be patient, it often takes months. And you’re absolutely right about getting settlement agreements in writing. One company I settled with tried to collect on the written-off debt balance and if I didn’t have the agreement in writing I don’t know what would’ve happened. In the end, reducing my debt by 85% was well worth the process.
Did you negotiate on your own
when you settled your debt. What did it do for your credit? Do you still have credit and credt cards you can use? I also work for the company that has my caredit card debt, I have never been late but to unedpeded house repairs, I have maxed my card to 10k I think i might be fired if I asked for a settlements.
thanks for your commnt and advise.
For those that consider us all deadbeats please pause a moment and consider there are facts you may not know. Don’t judge. My husband and I owe about $50,000 in unsecured debt due to job loss, medical hardship and a slow down in his industry (he’s a self-employed contractor). A triple whammy! We’ve seen our nest egg disappear, our 401K was cashed in to survive and then finally had to rely on credit cards to try and float. Last home we built took over 2 years to sell and we barely got enough to pay off the bank – all the payments and interest paid were a loss. I’m not asking for sympathy – nothing ventured, nothing gained. The real problem is our cc companies have raised rates from below 10% to as high as 34.99%. I want to repay the principal and am willing to repay with reasonable interest but 34.99 is outrageous! I’m not asking anyone to forgive what I charged – just stop making it impossible for me to make any headway. My conscience won’t allow me to ask anyone to foot my bills. Our family and friends have no idea of the drowning debt we have incurred. A. They can’t help us out and B. it’s so shameful.
There’s some good info in there about How to Settle credit card debt, thanks.
there are many people who are not aware of the existence of personal grants. It is indeed a great opportunity for you. You shouldn’t miss any grant that you are eligible for and you should fully utilize it to reduce your burden of debt. You will definitely be able to improve your financial situation.
I’m one of the deadbeats commented on here. I’m a smart 41 year old who has always had EXCELLENT credit. I have up to 5 offers for credit a day. Its been so easy to get credit. I have been stupid with my lifestyle and stupid with my finances. I haven’t missed a payment. I have been paying faithfully but I have too much unsecured debt and now the credit companies that offered me credit at a great rate have raised my intrest rate to over 23%. I’m not even in default. I called the company to ask for a lower rate. In the past I have never had a problem with this. But now!!! I can’t get it lowered. Remember I haven’t missed a payment and have had every intention of paying my debt. But with the intrest rate so high the payments are more then I can pay. What can I do about this. I’m considering stopping my payments to settle. I made a huge mistake and my family is drowning in over $1000.00 a month credit card debt. I have always been very responsible with my finances but with my income cut due to the economy what else can I do. I have always frowned on people that don’t pay their debt. I see them as deadbeats! People who try to beat the system. How can I be one of them. But at this point…I don’t see how not to be one!
opt out of that interest rate increase! this will keep you from using your card, but you dont need it anymore! they increased you because your credit score is bad, not because you missed payments, but because you are in too much debt. pay $30 for a credit report so you know where you stand.
currently im paying a third of my paycheck ($1000) a month. my minimum is about $550, it used to be more than $850 2 years ago. At that point, i said, no more and i went on a money diet. I built a home business to earn a few more bucks a year to keep me from going into more debt. I used mint to organize my budget, i got everything under control and now my payoff goal is in 3 years. compare this to 7 years of bad credit record and possibly bankruptcy. 7 years is a long time.
Just wanna say thank you for the information you have shared. Just continue writing this kind of post. I will be your loyal reader. Thanks again.
this advice is not the whole story — if your credit report has been clean so far and you are struggling to pay your bills, DO NOT STOP PAYING THEM, keep struggling, get a second job, turn off your cable, go on a diet, get out of debt and when you are done (even if its in 7 years), your credit score will increase and this will snowball your interest rates down and before you know it, you are out of debt and saving money for a new house!
Too many Americans today are struggling to make minimum payments on their credit cards. It is a growing problem with the state of our economy. I encourage you to join my forum so we can talk about it as a community. There are answers…
my story is an old one. Perfect credit. use one card and pay off monthly. no debt other than house payment. daughter wants to start a business. wants to do it right, go through the county for permits, plans and so on. she also has great credit. able to get personal line of credit and business credit card as well as personal credit cards. I know nothing about starting a business but daughter takes the classes and so on. lots of experience in the field she is going into. WELL, everyone wants a piece of the pie… county, planners, leasing/space rental people and so on. pretty soon she has exhausted her credit lines and comes to me for help. I get two personal lines plus a credit card, sign for the purchase of a truck to haul the merchandise.. things finally get rolling, almost making the bills when the daughter becomes ill with we don’t know what. this goes on for almost a year before there is finally a diagnosis. It is bad, eventually will cause her death. she is unable to leave the house and has a friend that is running the biz. THe biz has suffered greatly and so has my savings. I am 67 yrs old with an income of my own of $3300.00/mo. bills for the biz without purchase of ongoing merchandise is about $2500.00. the attorney tells me that if i file bk that i will lose my money market of almost 70k, what’s left of the business and trash my credit. so, I was talking with one of these consolidation companies today, they say they can reduce the debt by at least 50% and string out the payments for 4 yrs @about 900./mo, that it won’t ruin my credit bla,bla,bla. this will not include the truck payment which is $750/mo. and the company will charge me 9k to do this work of wonder. So, I ask anyone out there, should I just go ahead and trash my credit, do it myself and negotiate with these banks or let some company do it? My husband is going to kill me when he finds out so please respond quickly! thanks