Negotiating settlements on credit card debt is one of the fastest ways to reduced large portions of your credit card debt permanently. Although there are many companies advertising on radio and television to work for you in settling your credit card debt, it is possible to do it yourself without paying additional fees or a percentage of the amount you save to a third party. Here are five major points to keep in mind when settling your credit card debt.
1. It will be necessary to stop making payments on your credit cards. Generally, it seems that most banks, credit card issuers and other lending institutions are not interested in negotiating settlements with customers who are current on their payments. In my experience, most people who could save many thousands of dollars through debt settlement will not do so because they do not want to miss payments for two reasons.
First, they are worried about their credit score. The fear of hurting our credit score is quite common. Though I do not suggest that you should toss all concern for your credit score to the wind, I do suggest that you include consideration of your credit score as one point in a larger context of your overall finances. Your credit score is a tool that lenders use to determine the risk in lending to you. In many cases, having a lower credit score does not mean that you cannot get credit, only that the credit will come at higher interest. If the amount you can save through debt settlement greatly exceeds the amount you will pay through higher interest on a future loan, than the benefit of settlement outweighs the drop in credit score.
Second, they fell somehow “wrong” in missing a credit card payment. This is because we, as individuals, are taught to attach a great deal of emotion to our finances general and negative emotion to debt and the inability to pay off debt. By separating all emotionality from debt, you will be more successful in your settlement negotiations, which brings us to point number 2.
2. Treat debt settlement like a business negotiation, because it is. There is nothing wrong with you for being in debt. You are not a failure or a bad person. Our world runs on debt, every dollar in your pocket represents debt (the U.S. government owes the Federal Reserve $1 for borrowing that note). You are encouraged to borrow for school, cars, clothes, gasoline, homes and business. And in today’s economy, many of us are turning to credit to meet the shortfall between our income and our monthly expenses. This is the world we live in and the businesses that have chosen to lend money understand that life happens and some of their loans will not be repaid in full. The work those numbers into their business model they same way retailers know that November and December will be big and January will have a lot of returns. So when a collection’s agent tries to intimidate you buy calling into question your integrity because you are asking to settle the debt for less than is owed, remind yourself that this is a business deal and in business everyone is trying to negotiate the very best position for themselves or their company. You are the C.E.O of your own corporation, the corporation of You, and You have the right to reach the best financial terms for the health of your company as any other C.E.O. of any other business. One of the primary functions of every corporate C.E.O is keeping an eye on the company’s debt balances and negotiating out of debts, writing off debts, or selling debts in order to raise capital. You read about it every day in the Wall St. Journal. And they never take it personally or tell themselves they are bad people for doing it. If you’re going to play the same game, put yourself on the same playing field.
3. Be patient. In my experience, it takes three to four months from the time you stop making your payments before the banks or credit card companies will begin making settlement offers and their first offers will be very high. My own first offers ranged from 85% of the total debt to 92% of the total debt. One company offered to settle for my entire balance less the interest that had accrued from the time I stopped paying (no savings there). Usually, around the six month mark the bank will be getting ready to send the debt to a collection agency who will pay them far less for it, sometimes as little as 5%. Before that happens, they’ll be motivated to settle with you for more than they’ll get from collections. Generally, I hear about settlements in the 30-35% range as common after six to eight months of negotiating. I’ve heard as low as 15% but rarely. One of the biggest drawbacks to using a service agency to negotiate your debt (even one of the honest few) is that they don’t have the same stamina as you. They are either working for a fee and what to put in as few hours as possible to up their hourly rate on that fee, or they are working on a commission and want to book it as quickly as possible. So when the first offers start coming in at 50-60%, they may tell you to take it because they book their fee and move onto the next client. You, on the other hand, will have the patience to wait two, three, four more months for a settlement in the 35%, maybe even 20% range because it means a greater savings to you.
4. Get your settlement agreements in writing. I cannot stress this enough. I had one bank offer me a settlement, which I accepted, then tell me to send them the money and afterward they would send me a statement saying the account was settled in full. I asked, “Would you pay for a house and then look at the loan agreement?” Of course not. I had another bank settle with me then send the balance (the amount written off) to a collection agency to try to collect on it. If I hadn’t had had a settlement agreement in writing I might have been stuck with that debt but with the agreement it went away.
5. Live your life. Too often we allow serious debt and the stress associated with it to define our lives, our relationships, our moods and our actions. Along with giving up the emotion attached to debt, give up the sense that you have to stop enjoying life just because you are having financial troubles. Smile, walk in the park, go to a movie, eat ice cream, love you spouse, laugh with your children. You have the debt, live with it, don’t let it live you.
Ken
The cards that you did keep in good standing or had zero balances. How were they affected. Did your credit lines shrink on the cards that were in good standing as a result of the settlement process and the effects on your credit rating?
I am worried about loosing my lines of credit that are in good standing.
Thanks
Matt Sims
HI Matt, in fact, yes, the cards that I kept current were affected. One card with a $20,000 line was reduced to $12,500, but it happened at a time when the news was reporting that this was happening across the board, so I’m not sure if it was due to my recent settlement activity, or just the practice at the moment. After many months of not making payments on my other cards, almost a year really, both of the cards raised my interest rates as well. I’m still carrying those balances. Kenny
Ken
Do you have any experience settling with Chase? Any success? I am having a hard time with them.
Any feedback would be greatly appreciated.
Thanks
Matt
Chase was one of the banks that I dealt with. I found them to be comparable to the other banks. Describe the hard time? How long have you been negotiating? Have they made a settlement offer? If so, for how much? Kenny
Chase: Three months into it, they offered 95%, I asked for 40%, they tried to get it approved and it was denied and they offered 75% after the 40% denial. That was a month ago. I just passed the 120 day late mark, and since they changed my interest from 9 to 28 the balance is climbing and now around $17k and today pre-litigation called informing me that they are going to pursue litigation unless I come up with 65%.
I am standing my ground and hoping for a better offer. Please offer some advice or feedback as soon as you can.
Thanks
Matt
Did you have to come up with the full settlement to pay them off?
If so, how?
Hi Nick,
That’s a great question. Thanks for taking the time to come to my blog and ask it.
When settling an account for less than the amount owed, you do have to make the settlement payment, yes. So, for instance, if you’ve got a $10,000 balance and settle for $3500, you need to pay the $3500 up front to settle the entire account in full. Or, you could ask the bank to take a payment plan even on the settlement.
Many people stop right there with debt settlement because they think they can’t afford it. But let’s do the math. If you’re paying 29% on that $10,000, that’s $2900 a year, about $250 a month. Let’s say you stop paying your cards and it takes 10 months to reach a settlement of $3500. If you were to set aside the $250 a month that you would have been paying in interest on your card, you’ll have $2500 of the $3500. Which means you only have to save an extra $100 a month, about $3 a day (make coffee at home in the morning instead of going to Starbucks), and you’ll have the $3500 to settle out the entire $10,000.
If you’d paid the $250 a month, you’d have given the bank $2500 and still owe the full $10,000. By settling, the entire balance is gone and you won’t be paying that $2900 year after year, either.
And even then, many banks will accept a payment plan for the settlement. In all likelihood, it’ll be a much more accelerated payment than what your regular minimum payment would be, perhaps over 3-4 months. But here’s the trick, you’ll have to make every payment, no skipping now. If you make two then miss one, the settlement agreement will void.
Like always, be sure to get every settlement agreement IN WRITING before sending in any payments. I give copies of all my settlement agreements in the book for you to review the language, but definitely consult an attorney to make sure that your agreements cover all the needed language to protect you.
Did you see the piece on KCAL 9 news tonight?
Kenny
Hi Kenny
Great book. Okay – stopped paying – the calls are coming. I am trying to decide if I should “be invisible” and not answer any of the calls or if it is better to speak with them. I do not see the point in speaking with them at this stage or maybe never speaking with them other than in a few months and then only to tell them to call my attorney. As you said – your speaking with them seemed to not be in your best interest. So, is it better to ignore them completely until they can see that no cards / loans are being paid so that they can see the severity of the situation?
Hi Nick. I’m glad you’re finding value in the book. When I was in the process of negotiating with my creditors I choose to speak with them often but not every time they called. I couldn’t get through my day if I took every call, but at least once a week or so I would take the call and tell them where I was at. When I had some money to settle with, even though I initially wanted them to talk to my attorney, it seemed they were more willing to negotiate with me directly than with my attorney. I never wanted to “duck” them completely, as I wanted them to know that I was aware of them, facing the issue and working on it, just not yet ready to do anything about it. I also found a lot of self-empowerment in the choice to talk to them. Once I’d discarded any sense of “wrongness” in my debt, when I had nothing to fear from the phone calls and no anxiety around them, talking to them, for me, was a way to express to them that I wasn’t emotionally attached and I could participate in the negotiations from a place of strength. All the best, Kenny
I found when I do speak with the collection agencies, it is a waste of time. It is amazing at how little infomation they have – and the information that they do have is incorrect.
They seem to have a name, a telephone number, a $ amount (Unverified) and an attitude. – and NO AUTHORITY WHATSOEVER. When I spoke, it just increased the frequency of the calls, with no details or link to previous conversations – most of them made antagonistic statements and false accusations. It was a pointless excercise – on both our parts.
Do those tactics actually get them results?
Kenny,
I saw you on KCAL, went to your site and ordered the book. I’m interested in the answer to Matt’s question, “The cards that you did keep in good standing or had zero balances. How were they affected?”
I look forward to receiving the book and hope it has the solutions needed to get out of debt.
Thanks,
Geno
Hi, Geno. Thanks for ordering the book. I hope you enjoy it. As I mentioned in Matt’s question, one of the cards I kept current did reduce my available credit from $20,000 to $12,500. Both raised my interest rates but it took awhile, almost a year from the time I first stopped making payments on the other cards. I’m still carrying that $30,000 on the two cards I kept current. I look forward to any questions you have after you’ve look at the book. All the best, Kenny
Do you need to be employed in-order to settle with a credit card company?
I was not employed during my entire process negotiating settlements. In fact, I suspect that being unemployed might work in your favor when it comes to settlement negotiations, as your creditors will be more willing to understand that making the full payments is a burden for you and settlement might be a better option for both parties.
My husband & I are separating. I want to try to use a debt reduction on the credit cards just in my name. He will continue to pay on the ones in both of our names. How will my actions affect his credit?
I wish I could say I knew for certain but this is an area I’m not familiar with, since I am not married and had no experience in joint cardholder situations. However, I would say that simply asking how a credit score could be affected is only one aspect of a much larger financial pictures. Depending on the full scale of your joint and individual assets and debts, credit card debt settlement, even with a reduced credit score, may be more financially beneficial than servicing a large amount of debt when your finances won’t allow it, simply to maintain a high credit standing. Either way, though, since you and your husband have a connected financial picture it is a conversation for you to have, and to agree upon, together. I hope that helps. Kenny
Kenny,
I heard you today on a podcast of the Thom Hartmann Show. It was like you were talking directly to me. I am a Personal Injury Attorney, and two years ago I tried a wrongful death case that “needed to be tried.” Unfortunately, after deliberating for three days (I obviously gave them something to think about) the Jury found against my client. Not only did I NOT get paid for the 6 years of work I put into the case, but also, (because my client didn’t have any money to reimburse me for the costs), I was left “holding the bag” for the $50,000 in costs that I borrowed on a bank line-of-credit to hire the experts, etc., necessary to prosecute the case. I have been making minimum monthly payments on the line-of-credit for the last two years (it was a “signature” loan, so even though it was “firm debt,” I was personally liable for it). I have been working my cases, hoping for my “next big verdict” so I could pay off the line-of-credit. Unfortunately, with a $50,000 “mill-stone” hanging around my neck, I was never able to get my little solo practice “healthy” again. I shut down the practice at the beginning of the year, and have been working for a larger firm that can afford to give me a regular pay check.
Here is my question: Do you think your “credit card” program will work with a bank line-of-credit?
Hi Steve,
First, let me express my regret for your situation. You are not alone. I have so many readers whose stories are so similar to mine and yours. Small business owners and entrepreneurs have been especially hard hit in the recent financial situation because our normal practice of business and cash flow has been interrupted by unexpected changes in the economy.
The answer to your question is that, in my personal experience, a bank line of credit was treated no differently than a personal credit card. I had seven different credit accounts at six major US banks, and three of those were business lines of credit. In each case I was able to settle the debt for about 35% of the balance.
Thanks for your question, and I wish you the best of success in settling your debt.
Kenny
Kenny-
Did you uhave personal guarantees on your business lines of credit?
When you stopped paying and eventually settled on your business credit cards/business lines of credit, did they report the engative information on your personal credit? The reason I ask is because i hve several business credit cards yet none of them currently appear on my personal credit report. I am wondering if when I start your process, the results will show up on my personal credit. What’s your experience with this?
Hi Tucker,
I did have personal guarantees on all my business lines of credit. It would be difficult for me to assess whether or not my halting payment on those loans, and then settling them, had an effect on my personal credit. When I stopped making payments on five cards, three business, two personal, both my business and personal credit scores adjusted lower. I wouldn’t be able to separate the effects. It’s a good question, though. I’ll look into it and let you know if I find anything. Please do the same. And thanks for ordering the book. Kenny
Hi, Matt. The good news is they are negotiating. I had a similar experience. 85-95% on the early calls, then they dropped to about 65%, 55%, and finally in the 30-35% range. Some of my balances continued to accrue interest and others did not. I was sued by one company, which you read about in The Do-It-Yourself Bailout. I found that the suit was another method the bank used to urge me to settle at a higher amount, in that one case about 44%. In fact, the lawsuit came with several pages to explain the arbitration and mediation process. Also, telling you that you are in “pre-legal” may or may not mean that a lawsuit will come. I had several banks tell me I was in pre-legal and only one actually file a suit. If you are served, you should definitely consult an attorney who specializes in bankruptcy to help you. In the end, the choice of how long you want to wait and where your personal level of acceptable settlement is, is up to you. But it sounds like the process you are experiencing is exactly the same as that I went through and wrote about in The Do-It-Yourself Bailout.