Home » Credit Card Debt Settlement: Does it Work?

Credit Card Debt Settlement: Does it Work?

To the average consumer, credit card debt settlement may seem like a scam. Why would your creditor be willing to take a fraction of what you owe, as much as 50 percent less, in return for a lump sum settlement? Doesn’t the creditor lose substantial amounts of money in this scenario? What is the catch?

These are legitimate questions that you should ask before entering into an agreement with a debt settlement company, but the first step is learning about the process to determine if it is right for you.

Why It Works

So why would a creditor be willing to accept just a portion of what is owed on a credit card debt? If your debt ends up in bankruptcy court, even Chapter 13 bankruptcy, the creditor faces a huge chance that the debt will not be paid. If you do not pay your debt, the creditor loses all of the money it represents. Accepting just a portion of the debt is better than losing all of it.

Creditors do not, however, make it easy for you to pursue settlement of debt. First, you have to prove that you cannot pay what you owe. For most, this means you have to be several months behind on your credit card debts before they will even consider accepting debt settlements. Second, even when you are far behind, the negotiation process is complex, and you will not get the answer you want on your first phone call. You have to be persistent in order to get the creditor to agree to debt settlement.

How It Works

In a typical credit card debt settlement scenario, the borrower negotiates with the creditor, either on his own or with the help of a professional debt settlement company, to pay down the debt for much less than is actually owed. This occurs after the debt has been unpaid for several months. The creditor will require the money in one upfront payment or paid out over a short period of time. This means the borrower must have access to the funds in order to agree to debt settlement.

Once the debt settlement amount is paid, the debt is marked as “settled” or “charged off.” At this point the creditor will no longer seek to reclaim the remaining portion of the debt. This does impact your credit rating, but it has less of an impact than bankruptcy has. For this reason, debt settlement should be considered a last chance effort for dealing with debt, not a first choice.

What Debt Settlement Cannot Do

Debt settlement cannot stop the collection calls. During the period of time when you are saving up the money for your settlement or are negotiating with your creditors, the creditors have the right to pursue collection actions. They may call, write, or even pursue legal action to attempt to get what you owe.

Debt settlement cannot teach you how to manage your money. Settlement will not work to improve your financial situation if you continue to charge things to your credit cards and increase your debt load. You will simply end up deeper in debt with a lower credit rating after settlement if you cannot learn how to budget first.