Settling Credit Card Debt
You may be able to settle your debt by paying less than the original amount or by paying in installments. Here are a few important things to keep in mind if you are trying to negotiate a settlement for a credit card debt with a creditor.
Your debt may have been bought by a debt collection company
These types of companies often buy the debts for a much smaller amount than what you actually owe. Their goal is to collect more than they paid for the debt and cover their costs to collect the money. They may accept a deal if you offer a reasonable amount over what they paid for the debt, that covers their costs, and provides a reasonable profit.
Creditors get a tax savings on uncollected debt
The creditor you originally owe money to can get tax savings of about a third of the amount of any uncollected debt. So they are likely to consider an offer from you that's more than they would receive in tax savings, especially if the amount they receive from you, plus the tax savings on the remaining amount approaches or exceeds what they have paid out.
Settling your debt
You may be able to settle if you offer to pay roughly half of the amount as a single payment
If the creditor has not yet filed a lawsuit against you, you may be able to settle by offering a single (or lump-sum) payment of a portion of what you owe. The creditor sometimes has an incentive to take this lesser amount because it removes the risk of spending time, energy, and money trying to collect later on.
If a creditor does accept a smaller amount, you may have to report this on your taxes
You may have to pay taxes on the amount of debt that is forgiven in a negotiation. If the other side accepts an offer of more than $600 below the amount owed, the creditor will send you and the IRS a tax form identifying the amount forgiven as taxable income. Depending on your financial situation, you may have to pay income tax on this amount.
-
If you are “judgment-proof” voluntary payment may be the only way that the creditor might be able to get anything from you.
-
If you plan on paying in installments, pretend that you are making that monthly payment as soon as possible, and save the money each month. This will confirm to yourself that you can afford the monthly payment, and the amount you save can later be used as a lump-sum settlement offer, or help you out later on if you have difficulty making the payment during some months.