If you’re overwhelmed with credit card debt, negotiating a settlement can allow you to satisfy the outstanding debt for less than what you owe. However, trying to negotiate a credit card debt settlement yourself can be a bad idea.
Here’s what you need to know about credit card debt settlement and why it can make sense to hire an experienced debt relief attorney to help you.
Understanding Credit Card Debt Settlement
Credit card debt settlement is one way to obtain relief from creditors and debt collectors. Here’s what it is and how it works.
What Is Credit Card Debt Settlement?
Debt settlement involves negotiating with a credit card company or debt collection agency to pay less than what you owe. The rest of the debt is then forgiven. It’s generally reserved for unsecured debts, such as credit card balances, medical bills, and personal loans. However, it’s sometimes also possible to settle secured debt.
You may consider settlement if you’re in financial trouble and have fallen behind on your payments. Additionally, you’ve considered other debt relief options, such as a debt consolidation loan or a debt management plan, and they aren’t a good option.
Debt settlement can be an excellent alternative to filing for bankruptcy because it typically has less of an impact on your credit score.
How Does the Debt Settlement Process Work?
When you start the debt settlement process, either you, a debt settlement attorney, or a debt relief company will negotiate with your creditors. During that time, you’ll typically stop making payments on your accounts.
If you can provide a convincing argument, the credit card issuer or debt collection firm may be willing to accept less than the full amount owed.
Once you complete the negotiations and pay the agreed-upon amount, the debt will be satisfied, and the creditor will agree to stop further collection efforts. Keep in mind, though, that canceled debt is often considered taxable income, and you may need to report it on your tax return.
If more than $600 was discharged, the creditor will provide you with a 1099-C form detailing the amount of money that was canceled and the date of the cancellation.
Types of credit card debt settlements
There are a few different ways you may be able to negotiate a settlement for your credit card bills. While a lump-sum payment is common, it’s important to consider all of your options:
- Lump-sum settlement: You’ll pay a reduced, one-time lump sum to fully settle the debt.
- Workout agreement: Involves negotiating new repayment terms, such as lower interest rates or waived late fees, without reducing the principal balance.
- Hardship plan: A financial hardship plan is a temporary modification of loan terms, such as forbearance, reduced monthly payments, deferred debt payments, and waived fees, due to short-term financial difficulties.
Risks Associated with DIY Credit Card Debt Settlement
While you can technically negotiate with your creditors on your own, there are a few reasons why seeking assistance may be a better option.
Limited Negotiation Experience
Limited negotiation experience in DIY debt settlement can lead to less favorable deals, as creditors have trained professionals skilled in negotiation who may try to steer you toward a resolution that’s not a good fit.
For example, borrowers may accept higher settlements, fail to secure better terms, or overlook key details in written agreements. Miscommunication or lack of strategy can weaken their position, making professional assistance a smarter choice for better outcomes.
Potential for Higher Costs
Limited experience can also lead to higher costs in the form of a higher settlement amount, lower interest options, and missed fee waivers.
Risk of Credit Score Damage
A DIY approach to debt settlement carries a risk of credit score damage if not handled correctly. In particular, failing to secure proper documentation may lead to unresolved debt issues, causing further negative effects to your credit report and credit score, along with your future borrowing opportunities.
Challenges in Negotiating Debt Settlement
Navigating the debt settlement process can be difficult, especially if you’ve never dealt with debt collectors in the past. Here are some that could increase your risks when attempting debt settlement on your own.
Legal Complications
If a debt collector has sued you over money you owe, settlement may be your best option. However, not properly responding to the complaint can lead to a default judgment by the court, removing any potential leverage you may have.
Additionally, settling without a written agreement can leave room for disputes, risking further collection efforts.
Difficulties in Communicating with Creditors
As previously mentioned, debt collectors have trained representatives who may take advantage of your lack of knowledge or experience with the negotiation process. Poor communication can lead to misunderstandings, delays, or a rejected settlement offer, making it harder to secure a favorable agreement and resolve the debt.
Emotional Stress and Time Commitment
A debt settlement plan can take several years in some cases, which can be extremely overwhelming and frustrating. The process requires persistence, financial analysis, and dealing with aggressive negotiation tactics, all while you need to continue with your normal life, which can be mentally exhausting.
Comparing DIY Settlement to Professional Assistance
When you work with a debt settlement attorney, you get to offload most of the work of dealing with your creditors. Your attorney will take over phone calls and other communications and has the legal knowledge and experience to negotiate with your best interest at heart.
Other benefits of working with professional assistance include:
- Ensuring you make the right choice about the type of settlement based on your financial situation.
- Helping you secure better terms.
- Protecting your rights as a consumer.
- Handling all negotiations to minimize your stress.
- Helping minimize the long-term negative impact to your credit.
- Reducing your risk of a lawsuit and harassment.
- Ensuring you have the proper documentation.
When to Consider Seeking Professional Help
It can be a good idea to consult with an experienced debt attorney or debt relief company in the following situations:
- You have a significant amount of unpaid debts in collections that you’re looking to settle.
- You’re having a hard time understanding the debt agreements.
- Your creditors are uncooperative or unwilling to negotiate on fair terms.
- You’re facing a lawsuit.
- The prospect of negotiating with creditors is overwhelming, and you’re unsure how to proceed.
- You want to minimize the potential negative consequences of credit settlement.
The Bottom Line: Why Debt Settlement May Be a Bad Idea
Debt settlement programs can provide relief from overwhelming credit card debt, but navigating the process on your own comes with certain risks and challenges. Limited negotiation experience, legal complications, and potential credit damage can make DIY settlement a difficult process. Hiring a debt settlement attorney can help secure better terms, protect your rights, and reduce stress.
Tayne Law Group has been helping clients resolve their debts for more than 20 years. We offer a free, no-obligation phone consultation so you can talk one-on-one with one of our experienced staff members to learn your options. And you don’t have to worry about paying a dime unless you decide to hire our services. Call our offices at (866) 890-7337 or fill out our short contact form for a free consultation. We never share or sell your information.
