Editorial Policy

Settlement unlikely until you’re behind on payments

Erica Sandberg

November 19, 2015

QHi Erica,

This is something I’ve been wondering about: Do I need to be behind on a credit card to make a settlement with them? If so, how behind should I get? What kind of settlement can I expect to get?
— Gabriella

ADear Gabriella,

Yes, in most cases you would need to be delinquent on your credit card account for the issuer to even consider a debt settlement. A debt settlement is an agreement between debtor and creditor for a reduced balance which is deemed payment in full.

However, no one can say for sure what the credit card issuer might do when presented with such an offer. There are no laws requiring the company to slash a legitimately incurred obligation in a certain time frame or by a fixed percentage. That decision would be based on internal business policies and what you can negotiate.Ask Erica

Keep in mind that most settlements are arranged between debtor and collection agency, not with the original credit card issuer. That means a settlement would occur after the account has been sold to a third party collector, not when you’ve just skipped a few payment cycles. Still, some issuers will work with you before purging a delinquent account from the accounting books. In fact, I’ve known a few to send settlement offers to cardholders who are many months behind on payments.

It makes sense for a credit card issuer to wait for a cardholder to fall behind before considering a settlement arrangement. After all, if you’re keeping the account in good standing, you’re proving you can afford the payments.

However, if you stop making payments the issuer may fear you’re in financial trouble and be willing to work with you before you do something drastic. Some people file for bankruptcy protection when they can’t cover their bills, and when that happens the issuer loses the entire sum. If you don’t go the bankruptcy route, you could ignore your bills until the creditor charges the debt off, sells the account at a loss to a collection agency, or sues you for the balance due. None of these actions is ideal. If you’re hit with a judgment and have no claimable assets, the issuer won’t get a thing.

If you really want to try for a debt settlement and you’re behind on bills because you genuinely can’t meet the payments, try this: If you have some cash to offer (no specific amount, but half the balance is a good start), call the issuer and ask to speak with a supervisor regarding a settlement proposal.

For example, let’s say you owe $1,000 and haven’t made payments in three months. You were laid off so cash is terribly tight, but you have a little in savings — $500. You can ask if the issuer will accept the lump sum and be done with it. After deliberation, the issuer you’re communicating with may consent — or not. The issuer will either come back with a counteroffer or reject your proposal.

If you are able to negotiate the debt down, be sure to get the details of the agreement in writing before sending the money. Debt settlements have downsides: Be aware that all settlements are noted on your credit report. Creditors will see that you paid less than the total balance and typically view that negatively. Also, all forgiven debt is considered taxable income, so the deal may not be as lucrative as you think.

What I want you to do, though, is concentrate on a paying off your entire debt by sending as much as possible until it’s erased. Paying off your full debt is the better way by far. Not only will you keep your credit rating intact, but it’s the honorable thing to do.

Got a question for Erica? Send her an email.

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