Debt Settlement: A Guide for Negotiation

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 knowing how to ask for it.

When it comes to the balances you owe on your credit cards, the opportunity to negotiate what you actually owe is as great as ever. With a little bit of knowledge and guts, you might be able to cut your balances by 50-70%. Read on to find out how.

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. For example, someone who owes $10,000 on a single credit card may approach the credit card company and offer to pay $6,000. In return for this one-time payment, the credit card company agrees to forgive or erase the remaining $4,000.

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. Remember, 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 it success rate. But 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.

Although a debt settlement has some serious advantages, like shrinking your current debt load, it also has a couple of substantial shortfalls you need to consider. Failing to take these into account can potentially put you in a more stressful situation than before.

A debt settlement generally requires you to come up with a substantial amount of cash at one time. Remember, this is what makes the debt settlement attractive to your lenders. Instead of receiving minimum monthly payments for the next few years, they're 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. In short, you need to be sure that the payment isn't going to leave you in a tight spot a few months down the road.

You also risk having your credit card account closed completely after the settlement is complete.

If you decide that a debt settlement is the right move for you, the next step is to decide if you want to do it yourself or hire 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 has no real ability to negotiate a better deal than the actual account-holder. Furthermore, the debt settlement industry has its fair share of con artists, rip-offs, and scams. With that in mind, many people wisely choose to try it on their own first. (See "Negotiating a Debt Settlement" to learn about hiring a negotiator.)

Whether you choose to use a professional or not, one of the key ingredients in negotiating successfully is to make it appear that you're really in a bad position financially. If your lender truly believes that you're between a rock and a hard place, it will be more likely to believe that that it will lose out by rejecting your offer. When they look at your last few months' card statements (and they will) and sees numerous trips to five-star restaurants or designer-boutique shopping sprees, they will be unlikely to view you as truly 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 than the minimum) on time every month, you look like someone who is on the verge of walking away from your debt obligations. With this in mind, your debt settlement offers should be directed toward companies where you've fallen behind on your payments.

When it comes time to settle, you'll want to start the process 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." Once you have someone from this department on the phone, you'll want to 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 from any one company.

As a rule of thumb, start by offering your lender a specific dollar amount that is roughly 30% of your outstanding balance on the account. Chances are, it will counter your offer with a higher percentage or dollar amount. If the lender suggests anything above 50%, 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.

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.

This would be a great time to ask your credit card company if it can lower your card's annual percentage rate (APR), lower your monthly payment, or provide an alternative payment plan. Many times, your credit card's debt settlement representative feels bad for having to say "no" and may be more apt to say "yes" to one of these other options.

Another strategy, especially if you owe a lot across several credit cards, is debt consolidation. For more on this, see "What's the Difference Between Debt Consolidation and Debt Settlement?"