Offloading all or a portion of your debt via settlement can seem like a daunting task when you feel like you're in over your head with debt. But one of the great truths in business is that everything is negotiable. Even when the price or terms of something seem set in stone, getting a discount is often as easy as knowing whom to ask and how to ask for it.

When it comes to the balances you owe on your credit cards, there is an opportunity to negotiate what you actually owe. With a little bit of knowledge and guts, you might be able to cut your balances by as much as 50% to 70%.

Key Takeaways

  • You may need a significant amount of cash at one time to settle your debt.
  • Be careful of debt professionals who claim to be able to negotiate a better deal than you.
  • If you negotiate yourself, speak with a manager in the debt settlement department and start by offering 30% of your outstanding balance.

The Basics of Debt Settlement

Debt settlement is the process of offering a large, one-time payment toward an existing balance in return for the forgiveness of the remaining debt. Someone who owes $10,000 on a single credit card, for example, may approach the credit card company and offer to pay $5,000. In return for this one-time payment, the credit card company agrees to forgive or erase the remaining $5,000.

Why would a credit card issuer willingly choose to forgo a substantial portion of the balance it is owed? Usually it’s because it’s either strapped for cash itself or is fearful of your eventual inability to pay off the entire balance. In both situations the credit card issuer is trying to protect its financial bottom line—a key fact to remember as you begin negotiating. Credit cards generally represent unsecured loans, which means that there is no collateral your credit card company—or a debt collector—can seize to help repay an unpaid balance.

While getting your company to settle your balance may sound too good to be true, it’s not. Not surprisingly, lenders don’t like to advertise settlement, and there are no independent statistics about its success rate. Still, if you’re severely behind on your payments and spiraling toward bankruptcy, your lender may be willing to take what it can get, giving you one last chance to get back on your feet.

50-70%

The amount by which you might be able to cut your balances by negotiating your debt.

The Downsides of Debt Settlement

Although a debt settlement has some serious advantages, such as shrinking your current debt load, it also has a few downsides you need to consider. Failing to take these into account can potentially put you in a more stressful situation than before.

First, a debt settlement generally requires you to come up with a substantial amount of cash at one time. This is what makes the debt settlement attractive to your lender: Instead of receiving minimum monthly payments for the next few years, it’s getting a much larger payment now. You’ll need to stop and consider where the funds are going to come from and how that money could be used elsewhere in your personal finances. You need to be sure that making the payment now isn’t going to leave you in a tight spot a few months down the road.

Second, you risk having your credit card account closed completely after the settlement is complete. As you have proven unable to pay what you owe, your lender may not be inclined to keep you as a client.

Third, debt settlement can affect your credit score adversely. This, in turn, will make it harder for you to borrow money at good interest rates or even to get credit at all in the future.

Should You Do It Yourself?

If you decide that a debt settlement is the right move, the next step is to choose between doing it yourself or hiring a professional debt negotiator. In making this decision, it’s important to keep in mind that your credit card company is obligated to deal with you, and that a debt professional may not be able to negotiate a better deal than you can. Furthermore, the debt settlement industry has its fair share of con artists, ripoffs, and scams. This is why many people choose to try it on their own first.

Debt settlement can adversely impact your credit score, making it more difficult in the future to borrow money at affordable interest rates.

Appearances Matter

Whether you use a professional or not, one of the key ingredients in negotiating successfully is to make it clear that you’re in a bad position financially. If your lender firmly believes that you’re between a rock and a hard place, it will be more likely to fear losing out by rejecting your offer. If your last few months of card statements show numerous trips to five-star restaurants or designer-boutique shopping sprees, your lender will be unlikely to view you as being in need or worthy of sympathy. To raise your chances of success, you should cut your spending on that card down to zero for a three- to six-month period prior to requesting a settlement.

On the same note, if you’ve been making your minimum payment (or more) on time every month, you will look like someone who is attempting to walk away from your debt obligations. Your debt settlement offers should always be directed toward companies with which you’ve fallen behind on your payments.

The Negotiating Process

Start by calling the main phone number for your credit card’s customer service department and asking to speak to someone, preferably a manager, in the “debt settlements department.” Explain how dire your situation is. Highlight the fact that you’ve scraped a little bit of cash together and are hoping to settle one of your accounts before the money gets used up elsewhere. By mentioning the fact that you have multiple accounts on which you’re pursuing debt settlements, you’re more likely to get a competitive offer.

Offer a specific dollar amount that is roughly 30% of your outstanding balance on the account. Chances are that your lender will counter with a higher percentage or dollar amount. If anything above 50% is suggested, consider trying to settle with a different creditor or saving the money to help you pay future monthly bills.

Last but not least, once you’ve finalized your debt settlement with your lender, be sure to get the agreement in writing. It’s not unheard of for a credit card company to verbally agree to a debt settlement only to turn over the remaining balance to a collections agency. Be sure the written agreement spells out the amount you have to pay in order to have your entire balance excused from further payment.

The Bottom Line

While the possibility of negotiating a settlement should encourage everyone to try, there’s a good chance you’ll hear a “no” somewhere along the way. If this is the case, don’t just hang up the phone and walk away. Instead, ask your credit card company if it can lower your card’s annual percentage rate (APR), reduce your monthly payment, or provide an alternative payment plan. Often your credit card’s debt settlement representative will feel bad for having had to reject your offer and be willing to agree to one of these other options.

Finally, another strategy to consider, especially if you owe a lot across several credit cards, is debt consolidation. That, however, is a different article.