Credit Card Debt Negotiation? It’s Possible But Not Easy

As a general rule people who are wallowing in a sea of credit card debt want only one thing – to get out of it. One possible solution is a chapter 7 bankruptcy. But bankruptcy has some severe downsides. For one thing you might not be able to get new credit for two to three years and when you are able to get it, you could be charged interest as high as 18%. Moreover, a bankruptcy will stay in your credit file for as many as 10 years. You might not be able to buy a house or a new car until those 10 years have elapsed. And a bankruptcy will stay in your personal file for the rest your life.

What are the options?

Besides bankruptcy there are several different options for getting help with your credit card bills. For one thing you might be able to get a debt consolidation loan and pay them all off. This should leave you with a lower monthly payment than the sum of the credit card payments you’ve been making. You’ll also probably have more time to pay off the loan, especially if you use a home equity loan or homeowner’s equity line of credit to pay off those cards. Of course, this does nothing to get rid of those credit card debts. You’re simply moving them from one set of creditors to a new one.

Credit card debt negotiation is no slam-dunk

While you might be able to work with your credit card issuers to get better terms or a partial settlement, working out such an agreement is not easy. You may need to make a dozen or more phone calls before you even reach a person that has the authority to negotiate with you. You may also end up having to wrestle with a bunch of details that don’t seem important to you now such as the impact on next year’s tax bill and to your credit score. Beyond this, there are three key steps to negotiating with a credit card company but they’re not very simple.

Step #1: Make a plan

When you contact one of your credit card issuers it’s important to have a plan. This is because there are five different arrangements you could request – workout arrangement, forbearance, lump-sum settlement, debt settlement and a debt management plan.

The most popular

Of these five different arrangements, the most popular is probably where you negotiate a lump sum payoff for less than you actually owe. Of course, you will need to have the money available to pay for any settlements you are able to negotiate. For example, if your credit limit was $3000 but you had a balance of $5000 including late fees and interest you might be able to get them eliminated if you agree to pay off your balance. Of course, this varies from creditor to creditor. If you are able to successfully negotiate a settlement make sure you get confirmation in writing the amount you have agreed to pay. Do understand that this will have a negative effect on your credit score – depending how your lender reports this to the credit bureaus.

Workout arrangement

If you’re not familiar with the term “workout arrangement” it’s where the credit card issuer or bank agrees to lower your interest rate and minimum monthly payment or eliminate them altogether. It often will also stop charging you punishing fees such as late fees and over-limit charges. It’s also possible to ask the company to forgive past fees, which would further reduce how much you owe. Of course, it may or may not do so. The downside if you request this is that your line of credit will probably be cut off so you will have to give up your cards. And again, there will be an impact your credit score.

Forbearance

In the event your financial situation is short-term such as being unemployed for several months you could request forbearance. This is much like a workout arrangement as your credit card provider would stop assessing late fees and lower or even eliminate your interest rate for a period of time. It might also let you stop making payments for a few months until you’re back on your feet. As you might guess this offers a short timeout from having to make full payments but doesn’t include forgiveness of any of your debts.

A debt management program

If you’re not comfortable with the idea of negotiating directly with your credit card companies you could go to a nonprofit credit-counseling agency for help. When you choose this option, you will be assigned a debt counselor that will work with you and your lender to get your debts restructured so you could afford them. In most cases, the counselor will be able to negotiate to reduce your interest payments and drop or reduce any punitive fees you’ve ben charged However, you will still have to pay the total amount you owe. Plus, all your credit card accounts will be closed. The good news is that a DMP (debt management program) won’t hurt your credit score. However, closing down those credit card accounts could very well damage it.

Debt settlement

In debt settlement you stop paying your creditors for months until they are willing to accept a lower payment. You do this either by negotiating directly with your creditors or by hiring a debt settlement company. As you might guess when you stop making payments this will do considerable harm to your credit history. Although of course, paying a part of what you owe is much better than paying nothing.

Step #2: Take a hard look at your debt and income

Before you start making phone calls to your credit card companies take a good close look at exactly whom you owe. You need to know how much of it is garbage like late fees, over-limit fees, and so forth. Once you separate these from your actual credit card balance, you may be shocked. You also need to take a hard look at your fixed expenses and income and determine how much you can afford to pay. The important thing is to not over extend yourself. You need to be able to buy groceries and pay your rent or mortgage payment before you pay those credit card bills. And don’t forget to build in some slack to cover those little unexpected expenses that can suddenly pop up. It’s important to have an emergency fund in your budget to cover these things.

Step #3: Begin making phone calls

Now, you should know exactly how much you can afford to pay so it’s time to hit the phone and see what help you could get. You may have to make a number of calls and talk with a bunch of different people. While you may have been told that the credit card companies won’t be willing to work with you until you are behind in your payments, it’s better is ask for help as soon as you see that you’re in a financial bind. In the event it’s a short-term issue you might call the credit card company, explain what’s happened and ask to be given forbearance. On the other hand, if your problem is long-term such as the death of your spouse or partner or a divorce, you may need debt settlement or debt management help from professionals.

Find someone with the authority to work with you

Just keep in mind that the customer service representatives that answer your initial calls probably won’t have the authority to help you. Tell whoever answers your initial calls that you need to speak with the department that handles debt settlement or workout arrangements. Or you might ask for the company’s credit manager. Once you reach a person that can work with you, get his or her name, phone number (with extension) and ID number (if he or she has one). After the call be sure to write down a summary of you conservation with the time and date. Put all of this in a notebook along with any correspondence between you and the credit card provider. Always be honest and upfront. Tell the credit manager or whomsoever that, “I’m having a problem but I do want to pay you. How can we work this out?”