The Truth about Credit Card Settlements

You’ve seen the television commercials and heard the radio advertisements, “I hired a company who settled my credit card debts for pennies on the dollar or a fraction of what I owed.” In recent years, consumer credit card debt has increased dramatically. It’s been reported that in 2008 the average household had $8,000 in credit card debt. The default interest rate, meaning the rate of interest you pay after you fail to make a payment, for some credit card companies can be as high as 30%. Consumers will never be able to pay off their credit card accounts when the interest rate is that high. 

Numerous companies advertise that they can settle your credit card debts and get the collectors off your back. Is any of this true? The answer is that some of it is true and some of it is untrue. There are many reputable consumer credit counseling companies (“credit counselor”) who can help you. What they do for you is negotiate a reduced monthly payment amount and/or interest rate with your credit card company so that your monthly payment is a more manageable amount. Then, you pay a portion of your paycheck each pay period to the credit counselor, who distributes the money to your creditors. This process can be successful if you earn enough income to pay the monthly payment and stick with the plan until all the debts are paid off. This will usually take several years. However, there many other credit counselors who will take your money and give you nothing in return. Avoid credit counselors or similar companies who charge a large initial fee or who make promises that sound too good to be true.

Another way to successfully settle credit card debts is to hire an attorney to negotiate a lump sum payment to the credit card company as a settlement in full. If you are in difficult financial circumstances, many credit card companies will accept a lump sum settlement of 50% or even less to settle the debt. This means that the credit card company is forgiving a portion of the debt and this debt forgiveness may be considered taxable income by the IRS. You should consult your tax advisor regarding the tax consequences of debt forgiveness. It is quite common for attorneys who practices in this area to settle tens of thousands of dollars in credit card debts for lump sum payments of 50% or less. Of course, you will also have to pay the attorney for the time he spends negotiating the settlement on your behalf.

There is a big distinction between settlement in full of a credit card debt and payment in full of a credit card debt. Settlement in full will have a negative impact on your credit score. However, over time and with some fiscal discipline you will be able to improve your credit. There is no doubt that settling credit card debts has a less negative impact on your credit score than filing bankruptcy.