Do you have credit card bad debt? Debt that you will never be able to repay? You might be able to settle some of your debts on certain accounts that are behind in the payments — especially the ones where you just can’t seem to make the monthly payments. Here is a method that is often used by credit card consolidation companies.
Understanding Discounted Debt Settlement Offers
Sometimes, when a creditor can see that you have not been able to pay the debit balance or even make a reasonable payment on your account for months, they may be open to negotiation. They figure that they won’t ever be able to collect the full amount of the debt plus interest from you. And they may even send you a discounted debt settlement offer in the mail.
If this happens, you could receive a proposed settlement offer in which you would only pay 50% or so of your debt balance, and where they would be willing to write off the rest of the money owed. They will usually insist on getting this all in one payment. But if it is a very large amount, they will sometimes agree to two or three installments instead of one lump sum.
Often, the letter will come from a debt collection agency. This might mean that your original lender has signed over the debt to debt collectors. Or it could merely mean that the collection agency does not own the debt, and is simply working for a percentage of whatever they can recover.
Why Do They Offer Debt Settlement?
Everyone is struggling these day. The finance companies sometimes offer this option if you are having a lot of trouble making your payments on time. They will reason that, if they have to take you to court to get the whole amount, this could be very expensive for them. And maybe they wouldn’t even collect anything in the end, because you might decide to declare bankruptcy.
You need to realize that your options are much more limited if you have already declared bankruptcy. Then the creditor will no longer see this as a threat to their future collection efforts.
So, here’s the bottom line. They have a choice between paying the cost of court proceedings and perhaps still getting nothing from you — or offering you a special settlement deal where you pay a smaller balance. They will usually decide that they are better off accepting half of what you owe than trying to get the full amount through the courts.
What Should You Do?
Whether you should accept their proposed settlement offer depends on many factors.
First, you should be aware that taking them up on their offer will have a negative effect on your credit report, since the company will have to write off part of this debt. If you can pay the full amount, that’s always better for your credit score. But, if you could have kept up the payments in a timely manner to begin with, then you would not have received an offer to settle your debt for less than the amount owed. And accepting the settlement offer is usually much better than having a court judgement against you.
Secondly, you must seriously consider how you can make the payment that they want. Does it mean that other debts will go unpaid for a couple of months? What will be the consequences of that? Would you have to miss rent payments, and perhaps lose your home? Think very carefully about how you can come up with the money before you agree to anything.
Third, even if you are inclined to to accept their offer, you might want to try negotiating a lower payoff amount. You would need to call them and explain that you cannot possibly pay what they have asked for, but you could pay 40% (or whatever you think you can manage). This is often worth trying, because it can save you some additional money without incurring any extra late charges or other penalties.
The Final Settlement
When you speak with the creditor, make sure that you write down the person’s name that you speak to. If they accept your offer, ask them to put it in writing. Then wait for the letter to come before you pay up. Finally, write a brief letter to send back along with your check. Explain that you are confirming your agreement with them, per their letter and your phone conversation. And that you understand that this is a complete settlement of your debt. Ask them to write back one more time, acknowledging that the debt has actually been paid off (but don’t be surprised if they don’t actually comply).
You should know that, if you decide NOT to accept the offer, they may eventually take the matter to court. A court might rule that you must pay the whole amount plus the costs, so you could have a whole lot more to pay.
If you do decide to accept their terms, always read the fine print on any offer. You need to make sure that this is a full settlement of all that you owe this company, and that they will write off any additional fees that may occur between now and the time you pay them. This way, they have no right to come back to you in the future, demanding more money.
After your debt has been settled, check your credit report to see what has been posted there. If you find any discrepancy, then you need to get the error fixed right away. You may need to provide the creditor and the credit reporting agency with copies of all relevant correspondence. Always make sure that you keep all of your paperwork, when you take this route to clear up credit card bad debt.
