Debt settlement involves settling your credit card debt for less than the full amount owed. Typically you can settle debt for between 50 to 70 per cent of the total amount owed; however this may vary depending on the amount owed and your creditor's perception of your personal situation. Settlement can be a viable alternative to bankruptcy, but should be used as a last resort.
Is Debt Settlement a Good Idea?
You should only consider making a settlement offer and settling debt for less than what you owe if there is no viable alternative and you are unable to pay your debt in any other way (such as by negotiating with creditors to lower interest or monthly payments and stretch out the amount of time you will be paying, or taking a consolidation loan). Debt settlement, although not as adverse as bankruptcy, can have a detrimental impact on your credit score. Your payment history makes up 35 per cent of your FICO score, and late payments (which generally must precede a debt settlement) as well as a statement that an account was "settled" can cause this portion of your FICO score to drop, causing an overall drop in your credit score.
If your debt greatly exceeds an amount you will be reasonably able to pay, and debt settlement is an option, it is a preferable alternative to bankruptcy and you should consider making a settlement offer.
Timing of Settlement Offer
Creditors usually will not negotiate with borrowers until they believe the account is in danger of going to collections. For most creditors, accounts are sent to collections after a period of six months from the time the account falls 30 days behind. Some creditors will consider settlement negotiations once payments are 60 days late, but most creditors are receptive to settlements when you are between 90 days and six months late on payments.
Creditors are generally more likely to accept a single lump sum payment as an offer than a series of payments, so it is advisable to save up a reasonable sum of cash prior to making a settlement offer. However, in some cases, creditors will agree to a payment plan that results in you paying back less than what you owe. These factors depend on the amount of debt you owe and your specific situation as well as the creditor's position on debt settlement.
Fair Debt Collection Practices
Typically, when you have begun to fall behind on payments, creditors will begin to call you to try to collect on the debt. These calls can become frequent. Ensure that you have read and understand the laws, including the Fair Debt Collection Practices Act. Creditors usually cannot call you before 8 a.m. or after 9 p.m., call you at work if they know your employer does not want you to receive such calls, tell others about your debt or make idle threats of legal action or send documents designed to look like legal papers. Be aware of these laws, and if lenders are calling you during the period when you are late or negotiating debt, ensure they follow the laws.
Make sure you put all offers in writing and do not send money to settle a debt until you have a letter detailing the specific terms of the settlement.