Excessive debt?
Take this quiz to find the best solution for you.
If you're seeking credit card debt relief (i.e. debt forgiveness), here's a step-by-step guide showing you how to negotiate a credit card debt settlement yourself.
Over the past 15 years, I've helped our clients obtain millions of dollars of debt relief without the need to file bankruptcy.
So you might be wondering, "Why is the president of a for-profit debt settlement company showing me how to negotiate settlements on my own?"
The answer is simple. We're a small, family-owned company and there's no way we can personally assist the hundreds of thousands of people struggling with past due credit card debt at any given time. So if you're willing to roll up your sleeves and do the work, I'll explain how to settle credit card debt for less than full balance.
The first thing you must understand is ...
Why Credit Credit Card Companies Negotiate
It's ALL about loss mitigation.
Whether we're in a good economy or not, a certain percentage (approx. 2-5%) of credit card accounts are delinquent. For credit card companies, it's just the cost of doing business — and they know it.
Each credit card company has their own policies and procedures, but at the end of the day they're simply trying to maximize recovery and minimize loss on delinquent accounts.
Remember, credit card debt is unsecured debt. If a credit card account becomes delinquent there's no property to repossess or put a lien on.
Therefore, when an account becomes delinquent, credit card companies have to decide whether it's worth pursuing the outstanding debt or just cutting their losses and moving on.
As the saying goes, businesses don't want to "throw good money after bad".
The Minimum Criteria For Attempting Credit Card Debt Settlement
Perhaps the biggest determinant of successfully negotiating settlements for less than full balance is making sure you meet the minimum criteria.
Having the best process in the world won't matter if the debt settlement process isn't the right solution for you.
If you don't meet the minimum criteria for the debt settlement process, better to know that upfront so you can pursue other options.
Here are the minimum criteria for attempting debt settlement:
- Legitimate financial hardship. No bank or credit card company is going to write off thousands (or tens of thousands) of dollars for no good reason. Nor should they. You need to demonstrate how your hardship resulted in your inability to pay. Examples of legitimate financial hardships would be a messy and expensive divorce, job loss or medical emergency.
- Unsecured debts only. The debt settlement process is for unsecured debts only. It will not work on secured debts like mortgages, car loans or student loans. (Technically, students loans are unsecured debts but they are treated like secure debts because it's currently next to impossible to discharge them via bankruptcy.)
- Settlement funds available. You can be the nicest, most well-intentioned person in the world, but if you don’t have any money to work with, there’s not much you can do in terms of settling your debts. How much money will you need? Although there are no guarantees, if you know what you’re doing, you should be able to negotiate settlements with most creditors for $0.50 on the dollar or less.
- Proper timeframe. I strongly recommend getting through the debt settlement process ASAP because creditors are not going to entertain settlement negotiations indefinitely. In fact, some may lose patience and sue you. Certain debt settlement companies advertise "debt settlement plans", implying you can take several years to get through the process. In my opinion, that's a recipe for disaster. Generally speaking, I recommend completing the debt settlement process in 12 months or less (18 months tops).
Drawbacks To The Debt Settlement Process
Although the debt settlement process can be a viable alternative to bankruptcy, it isn't perfect.
Here are some drawbacks to be aware of:
- Collection calls and letters. You are going to receive collection calls and letters during the debt settlement process. There’s no way of getting around this because creditors are legally entitled to contact you about past due balances. The key is keeping the collection activity to a minimum. For more info on this topic, read my free guide, "How To Deal With Debt Collectors".
- Possible litigation. As mentioned above, one or more of your creditors. could sue you for the outstanding balance. What's surprising, though, is the likelihood of getting sued over a past due credit card account is actually pretty small. With the clients we’ve worked with over the years, the litigation rate is less than 2%. So do some people get sued? Yes. But the vast majority do not. And even if you do get sued, you can usually still work something out voluntarily to settle the lawsuit.
- It's stressful. Creditors aren't going to write off a large portion of what you owe without a fight. You're going to have to confront some aggressive debt collectors during settlement negotiations. Many otherwise smart, successful people wilt under pressure when faced with a hostile adversary. So you have to honestly assess whether you're up to the task. (And there's no shame if you're not.)
- No guarantees. Success can vary depending on who your creditors are. Some might ultimately agree to settle for $0.30 on the dollar. With others, the best settlement you'll ever see is $0.55-$0.60 on the dollar. And once again, although unlikely, some creditors might litigate.
The Step-By-Step Process Of Credit Card Debt Settlement
If you've done your due diligence and made the calculation that the debt settlement process is in the best interest of you and your creditors, here's the process:
- Stop using your cards immediately. Creditors will not be very receptive to negotiating a reduced lump sum settlement if they see you ran up a bunch of charges just prior to starting the debt settlement process. It's bad optics.
- Your accounts must be past due. No credit card company will negotiate with you if your accounts are current. For some people, their accounts become delinquent because they literally have no money. For others, it's a conscious decision to stop their monthly payments. Please understand I am not telling you to not make your monthly payments. All I'm saying is if you want to attempt settlements for less than full balance, your accounts aren't eligible unless they're past due.
- Be patient. With most credit card companies, your accounts have to be at least a few months past due before they're ready to talk settlement. Don't try and rush the process because it won't work. Often a representative from the credit card company will leave you a voicemail indicating they're ready to negotiate a possible settlement, other times they'll send you a letter in the mail indicating such. In either case, that's usually the signal for when to commence negotiations.
- Speak with the right person. Make sure to discuss any potential settlement with someone authorized to make a decision on settlement. Frontline customer service reps do not have the authority to make a settlement. When the time is right, you might have to specifically ask to speak with someone in their settlement department.
- Make your pitch. When your account is sufficiently past due so it's eligible for a settlement, it's time to make your offer. Here are some helpful negotiating tips:
- Present your offer verbally. Here's why. (It'll take too long to fully explain here. That's why I provided a link to the full explanation.)
- Have your funds ready to go. Never put forth a settlement offer unless you have the funds ready to disburse immediately. If they accept your offer and you don't have the funds immediately available, you'll lose your credibility and probably won't get a second chance. In addition, part of their incentive for accepting your offer is to bring closure to the matter today.
- What should you offer? Be aggressive, but don't be stupid. An offer of $0.10 on the dollar offer probably won't be accepted. You'll have a much better chance if you offer something in the $0.30-$0.50 on the dollar range. PRO TIP: Present your settlement offer as an actual dollar amount, not as a percentage of the outstanding balance. When you present your offer as a percentage, you're perceived as haggling. You will not succeed if you come across as a haggler. Instead, you need to come across as someone trying to make the best of a bad situation with a solution that works for both parties.
- Let them know you have other creditors. Politely let the credit card representative know that you have limited funds and you have other creditor accounts to address (assuming that you actually do). This creates a little urgency because if they balk at your offer, you're moving on to the next creditor on your list ... and it might be weeks or months before additional funds are available.
- Be humble and show remorse. No one likes a pompous you-know-what. Show a little contrition and tell them how deeply sorry you are that you're not able to pay as originally intended. You're dealing with real human beings here and they have the power to say yes or no to your offer. A sincere, heartfelt apology can go a long way toward reaching a mutually acceptable settlement.
- Mention bankruptcy. Briefly mention that you're attempting to work things out on a voluntary basis as an alternative to bankruptcy. However, don't overplay your hand. Credit card representatives hear the threat of bankruptcy all the time, so they're kind of immune to it. But it doesn't hurt to briefly mention that you're trying to avoid bankruptcy.
- Write out your talking points and rehearse. You ARE going to be nervous when you call. So jot down a few notes ahead of time and rehearse (preferably out loud). The credit card representative is definitely going to want to know the details of your hardship, so make sure you're able to communicate that clearly and succinctly. I've been a professional negotiator for years, and before calling to negotiate a settlement for a client I still rehearse and have notes on my desk to refer to.
- Document everything. Keep detailed notes. Write down who you spoke with, what number you dialed, what you discussed and whether or not any settlement amount was discussed. These details might be critical in future settlement discussions.
- Persist. Don't get discouraged if your initial offer is rejected. You might have to present multiple offers over a period of weeks or months before you reach a settlement agreement. They're not going to make it easy for you, so you have to stay mentally tough and not give up. I can't tell you how many times I've spoken with a credit card representative or debt collector telling me, "Oh, we never settle." or "The best we'll ever offer you is $0.80 on the dollar." ... then the following week we end up settling the account for $0.35 on the dollar!
- Get the settlement in writing. Once your reach a verbal agreement, the next step is to get the settlement in writing. The letter should clearly state the settlement amount and have some sort of verbiage saying "upon receipt of this amount, this account will settled and no further balance is owed". Never release settlement funds until you have a written settlement agreement. Make sure to keep a copy of your settlement letter in case you ever receive a collection call or letter in the future regarding that account.
- Release the settlement funds. To finalize the settlement, you need to deliver the settlement funds on or before the expiration date. Most settlement funds are remitted via ACH bank draft (aka "check by phone"). Make sure you write down who you spoke with that processed your payment. Every once in a blue moon a creditor or collection agency might require you to overnight a cashier's check to finalize a settlement. But the vast majority of settlements are finalized via ACH bank draft.
And that's the process. Rinse and repeat.
2 Common Myths About Credit Card Debt Negotiation
MYTH # 1 :
Demanding that derogatory information be erased from your credit report as part of the settlement.
Not to rain on your parade, but you don't have the leverage to make this demand. Ain't gonna happen. More importantly, the creditor or collection agency must comply with the FCRA (Fair Credit Reporting Act) and report what actually happened. That is, the account was settled for less than full balance. This is what will appear on your credit report. Having a few derogatory items on your credit report is not the end of the world. You can live a perfectly normal life with less than perfect credit for a few years. What's important is that you got much-needed debt relief without filing bankruptcy.
MYTH # 2 :
Sending a "cease and desist" letter is the best way to deal with debt collectors.
Certain “experts” advise sending a cease and desist letter to a creditor or collection agency as a way to magically stop collection calls. This is a very bad idea. With certain credit card companies, a cease and desist letter is an automatic trigger to fast-track your account for litigation. Besides, if your goal is to negotiate a settlement with a creditor, you need to keep an open line of communication. For these reasons, I never recommend sending a cease and desist letter.
DIY vs. Hiring A Professional: Pros and Cons
If you do the work yourself, obviously you’ll save money by not having to pay someone to do this for you. Here are a few things to consider when trying to decide whether to take the do-it-yourself approach to the debt settlement process versus hiring a professional:
- Scouting reports. Debt settlement professionals have access to “scouting reports” on all the major credit card companies and collection agencies. Each financial institution and agency has their own unique settlement procedures and nuances. You only get this critical data by working in the industry day in and day out. Scouting reports are the # 1 reason we get favorable settlements for our clients. You can certainly obtain settlements without scouting reports, but it's more difficult.
- Established contacts. Sometimes it's not what you know, but who you know. Debt settlement professionals often have existing relationships with representatives at credit card companies and collection agencies that do deals because they've worked together before. Having an established contact isn't required, but it can definitely open doors and get you past gatekeepers.
- Time. The debt settlement process is extremely time-consuming, not to mention mentally draining. So you'll need to be honest with yourself to determine if you're really up to the task.
- Negotiating skills. You are going to be dealing with some abrasive people during the debt settlement process. In addition, debt collection is largely about psychological manipulation and they're going to make things difficult for you. So you need to make sure you're prepared to deal with this if you want to succeed at debt settlement.
If you need credit card debt relief, but attempting debt settlement on your own seems overwhelming, let's talk to see if we can help you.
Conclusion
The debt settlement process is a lot like selling your home.
Are you required to hire a real estate agent to sell your home? Absolutely not. If you're willing to do the work, you can totally sell your home yourself and avoid paying the realtor fees.
Same thing applies to the debt settlement process. You can totally take the do-it-yourself approach and be successful.
However, if you need credit card debt relief but you'd prefer to have a professional handle the debt settlement process for you, request a free phone consultation and I'll be happy to assess your situation.
