DIY debt settlement is a hard road to travel
By Erica Sandberg
March 24, 2016
I’m not going to lie. I have credit card debt, and I don’t want to pay it. And I don’t want to file for bankruptcy. I’m interested in getting a cut on the $10,000 I owe. What can I do to get my card issuer to reduce the amount I owe?
— In Debt and Looking for a Deal
Dear In Debt and Looking for a Deal,
Oh, where do I start? By admonishing you for trying to avoid paying your creditors? Or maybe I should try to gently encourage you to make good on your debt, soothing you into doing the right thing?
However, it’s obvious you don’t want to hear that. What you seem to want is a debt settlement, so here is how that works:
If you can persuade a creditor to accept less than the amount you owe, you’re “settling” the debt. You can try it with the credit card company, but that rarely works. Most of the time these arrangements are made with collection agencies. These third-party companies purchase outstanding debts from creditors for less than the actual balance, but they will bill you for the entire sum. The margin is the company’s revenue.
A credit card issuer might sell off the debt if you, the cardholder, allow the account to go seriously delinquent. The issuer could sue you, and you would most likely lose the case, but if you don’t have any assets or earnings to claim, the credit card company wouldn’t get anything. On the other hand, a collection agency would at least pay the issuer a percentage of the amount owed, so the issuer will be guaranteed to recoup a portion of the balance due.
That would leave you with the collection agency and a potential settlement. If you can pay more than the amount the collection agency purchased the debt for, a deal may be struck. Of course, you won’t know what that figure is because the collection agency won’t tell you that, but with some back and forth you may come to an agreement on a settlement amount that is mutually beneficial.
Know that the process is rarely enjoyable. Collection agencies aren’t in the business of establishing friendly relationships with customers. Turning a profit is a collection agent’s sole motivation, and the more, the better. If the agency believes you’re messing around and have the money to spare, it might take you to court and you’ll owe even more because additional fees will be added.
You may negotiate a settlement on your own or hire a company that specializes in this sort of thing. Such a company will typically instruct you to deposit a specific sum into a type of savings account each month. When you have accumulated enough to offer a reasonable lump sum, it will present the offer — for a fee, of course — on your behalf.
Research debt settlement companies carefully, as there are debt collection scams. Check the companies out at your state attorney general’s website and with your local consumer protection agency before signing on with one.
However you arrange it, any debt settlement (that doesn’t qualify for an exclusion) creates a taxable event. For amounts more than $600, the creditor has a legal obligation to disclose the forgiven debt, via a 1099-C form that is sent to the IRS and the creditor. Don’t ignore a settlement’s impact on your credit rating, either. The late payments, charge-off and collection action will be listed on your credit reports for seven years, and that will take a terrible toll on your credit rating.
As for getting a merit badge for being honest with your desires, you won’t get one from me. No one wants to satisfy overwhelming debt obligations. It’s not fun. In fact, it can be miserable when you have to work harder and longer or cut back on luxuries and essentials to pay your debts. But most people do.
So I have a simple solution: In the future, if you don’t want to repay your debts, stop borrowing money.
Got a question for Erica? Send her an email.