Editorial Policy

How to Ask for a Debt Settlement

Erica Sandberg

May 1, 2012

QDear Erica,

Under what circumstances will a credit card company accept or offer a debt settlement? I currently owe about $10,000 on my Capital One card, and my girlfriend says that I can offer $5,000 to wipe the debt clean. Is she right? If so, how would I go about approaching them? And can you tell me what this would do to my credit? I’m already two months behind, so will it help me or hurt me in the long run? — Jed

ADear Jed,

There is no firm answer for when and why a credit card company will agree to a debt settlement. It’s a matter of policy and case-by-case consideration, not law. However, I can give you my opinion on the reception your offer would receive: At this point, I think it’d be pretty cold.Ask Erica

I’ve seen original creditors — companies that you borrow money from — take and even offer settlements. Yet most of the time, you would negotiate with a third-party collection agency if you want to pay less than the balance due. Why wouldn’t Capital One itself be open to negotiation? Because when they issued you the card, you signed an agreement promising to pay for whatever you charged, plus interest if you rolled the balance over to the following month. Essentially, they lent you the money and expect it back per the contract.

However, you are late on the payments now and the company might want to get something rather than nothing. You can suggest a deal, but for this to be a logical endeavor, you would have to have the full $5,000 ready to go. Then again, if you have that kind of cash lying around, wouldn’t you use it to make the payments? I would think that would be Capital One’s primary question. Still, if they say yes, you’d come out ahead financially, so I suppose it’s worth a shot. Give them a call and try.

If Capital One’s answer is no, let’s return to the entity that might be more open to a settlement — a third-party collector. Collectors are separate companies that buy outstanding debts for a percentage of what they are worth. And a collection agency is where your debt will likely end up if you continue to not pay Capital One. Instead of suing you, Capital One could sell the $10,000 debt to Bob’s Collection Agency for $3,000. Bob may be eager to take your $5,000 and call it a day because he’d still make a healthy profit and would not have to pay his employees to call you.

As for your credit reports, all settlements are noted as such on your file. Creditors will see that you paid less than the total balance, and they typically view that negatively. However, if you continue to not pay and the credit card company passes the debt to a collection agency, that will really look bad, so a settlement won’t do further harm.

If you do manage to settle the account with Capital One, be aware that you will almost certainly be faced with a tax consequence. A creditor that accepts at least $600 less than the original balance must file a 1099-C form with the IRS. The forgiven amount is considered income, and you’ll have to report it on your federal income tax return — meaning you might not be saving as much as you hoped.

My suggestion to you is this: Rather than try to get away with paying less, do everything possible to pay more. Honor your agreements. If you’re looking for alternative ways to contend with your financial problems, visit a credit counseling agency. A debt counselor can help you design a bare-bones budget, and you might be able to pay your obligations in full with a debt management program.

Got a question for Erica? Send her an email.