What Are the Options For Credit Card Debt Settlement?

Are you struggling under a growing mountain of credit card debt? You’re not alone. Credit card debt is an increasingly common problem in America.

Dealing with credit card debt can be stressful and overwhelming. Missed payments can damage your credit score and result in high-interest rates and fees. If the debt becomes completely unmanageable, you may even face legal action from creditors. However, you do have options – credit card debt settlement could provide a path to becoming debt-free.

In this post, we’ll explore the ins and outs of credit card debt settlement. You’ll learn how it works, the different programs available, whether it will impact your credit, and most importantly – if it’s the right debt relief option for your situation.

How Does Credit Card Debt Settlement Work?

Credit card debt settlement, also known as debt negotiation or arbitration, is an agreement between you (the debtor) and your credit card company. The goal is to settle your account for less than the full outstanding balance you owe.

Here’s a simple overview of the debt settlement process:

You stop making payments to your creditors and instead save money in a dedicated, secured account. This helps show creditors you’re serious about settling your debts.
A debt settlement company will negotiate with creditors on your behalf to reduce your total owed balance. Often settlements are reached at 30% to 60% less than the total amount owed.
Once a settlement offer acceptable to both you and the creditor is reached, the funds from your dedicated account are used to pay the settlement amount as a lump-sum payment. This is likely a smaller one-time payment than the monthly minimum payments originally required.
Upon receipt of the settlement payment, the creditor agrees to forgive the remainder of your debt. The account is typically closed out by the creditor with a “settled for less than full balance” status.

The typical debt settlement program length is 2 to 4 years. Therefore, credit card debt settlement requires patience, savings, and likely some sacrifices along the way. But it can be an effective way to resolve unmanageable credit card debts while avoiding bankruptcy.

What Debts Can Be Settled?

Many types of unsecured debt can potentially be settled, including:

Credit cards – This typically makes up the bulk of settled debts. Issuers often agree to negotiate balances to avoid write-offs.
Medical bills – With skyrocketing healthcare costs, even those with insurance often owe large medical bills that can sometimes be negotiated.
Personal loans – Banks, credit unions, and online lenders offering signature loans and debt consolidation loans may agree to settlements.
Past-due utilities – Electric, gas, water, phone, and cable bills often can be settled if you get behind.

Debts that generally cannot be negotiated through settlement include:

Student loans – Both federal and private student loan lenders rarely agree to settlement offers, although some exceptions exist in cases of permanent disability or death.
Auto loans – Your auto lender holds your car title as collateral and expects payment in full. Repossession is more likely than settlement offers from auto lenders.
Mortgages – Mortgage lenders make money by collecting mortgage payments including interest over decades. Settlement options are very limited, although short sales may be an option for some underwater homeowners.
Child support – Courts determine child support obligations and enforce payments to guard the best interests of children.
Alimony – Negotiating court-ordered alimony payments is very difficult, although modifications are possible if both parties agree or circumstances change significantly.
Recent debts – Creditors are less likely to settle accounts that are less than 6 months past due. Allow debts to become more delinquent before expecting reasonable settlement offers.
Secured debts – Any debt tied to an asset you pledged as collateral cannot be settled without full repayment or asset forfeiture.

Will Debt Settlement Hurt My Credit?

The impact of debt settlement on your credit is complex. On the positive side, resolving accounts for less than owed through settlement is still better than unpaid charge-offs dragging down your credit indefinitely.

However, any late payments and negotiated settlements will likely show on your credit reports. Missed payments also lower your credit utilization ratios. Both harm credit scores in the short term.

Many settled accounts will be closed out by creditors with changed statuses like “settled for less than full balance”. While a negative status, it still looks better than “charged off; bad debt”, especially if you eventually pay the settlement agreed to.

Over the long run after becoming debt-free, avoiding further missed payments or maxing out cards allows credit to gradually rebound for many. However, credit damage should be expected during the debt settlement process, typically lasting from 12 to 24 months.

Monthly payments to creditors who agree to stay open, like those handled by credit counseling agencies, cause much less credit damage.

Who is a Good Candidate for Debt Settlement?

So when does credit card debt settlement make strategic financial sense? Ask yourself the following:

Are you currently struggling to keep up with minimum monthly payments?
Have high-interest credit card balances made little progress in 6 months or more?
Are you relying heavily on new cards or debt to pay existing debts?
Are debt payments causing you to accumulate even more debt?
Have you already depleted emergency savings due to job loss or other hardship?

If you answered yes to some or all the above questions – debt settlement could provide much-needed relief. The key is having sufficient income or assets to one day pay lump-sum settlements without needing further loans or credit.

Debt settlement works best for those with high unsecured debt relative to assets and income. Typically, $10,000 or more in credit card or similar bad debts. If you have significant assets or high disposable income, Chapter 7 or 13 bankruptcy may be a better option to discuss with an advisor.

Now let’s recap the potential benefits and drawbacks of debt settlement.

Weighing Credit Card Debt Settlement Pros and Cons

Deciding if debt settlement is the right path forward depends on your specific financial situation. Carefully weigh the key pros and cons:

Pros:

Settle debt for less than you owe – usually 40 to 60% less
Resolve debt without bankruptcy
Consolidated payment schedule
The eventual light at the end of the tunnel
Stop accruing interest and fees
End creditor harassment

Cons

Tax forms issued for canceled debt
Upfront and ongoing service fees
Credit score drops initially
Accounts closed by creditors
Savings required to fund settlements
Legal action still possible

While debt settlement options can seem overwhelming at first – taking that first step is the hardest part. Speaking with a financial advisor or debt specialist can help you understand all of your options. Often, just having a plan helps relieve some financial stress.

Is Debt Settlement Right For You?

Debt settlement provides an option to resolve unmanageable debts for less than you owe. But it also involves sacrifice and discipline. You must stop paying creditors, save settlement funds, and endure some credit score damage.

If you have significant credit card debt but still have sufficient income to one day pay lump-sum settlements – it can prove an effective path forward. Just be sure to vet any debt settlement company thoroughly before enrolling.

Reputable firms help clients negotiate outstanding balances down to just 30% to 60% of what’s owed. Over time this leads to a debt-free life for those willing to weather the storm.

Just proceed with eyes wide open when it comes to the initial credit score impacts and tax implications. Have realistic expectations, stay disciplined with your savings goals, and you too could join the debt-free club in a few short years.