by Tracy Perez and Lori A. Curtis
03-Aug-2013

Many clients call in asking questions about negotiating paying a lower amount on their credit card debt.  There are companies out there that claim they will do this for you.  They may lead you to believe that you will end up paying pennies on the dollar.  In most cases however their promises are illusory.  Their written contracts do not guarantee certain results.  In the end the creditor, and not the debt settlement company, makes the final decision on whether it will settle the debt – and for how much.   

We have seen more than one client who paid several thousand dollars to a company that claimed it would negotiate their credit card debt for them, only to have the client end up being served with a lawsuit by a creditor suing to collect the debt.  We have also heard of many instances where the company has failed to accomplish anything for them, sometimes even disappearing with their money. (In one case, a client paid three thousand dollars to a company that disappeared three weeks later.)

You can usually negotiate settlements of your credit card debt on your own.   In most circumstances, however, you must already have defaulted on your payments.  Otherwise the creditors assume that you will continue to make the minimum monthly payments, with interest accruing over time to their benefit. We don’t advise you to default on your payments – it is just a sad fact that most creditors will not negotiate lower payments unless you really cannot afford to pay your minimum monthly balance.

If you ask the credit card company to take a lower amount, you can often negotiate a reduction to somewhere between 20% and  50% of the outstanding balance, but most credit card companies are only likely to accept this if you can pay the settlement amount  in a lump sum.  If you are not able to come up with the full lump sum, you may be able to work out a payment arrangement with the creditor which involves a lesser or no reduction of the outstanding balance.

In negotiating on your own, you should try to get the interest rate dropped, or stop the interest from accruing altogether.  The default interest rate typically ranges from 25 to 30 percent per annum, or higher, making it nearly impossible to maintain regular payments.

When you pay less than the full amount owed, the creditors typically report the debt to the credit bureaus as settled or satisfied but not paid in full. This will have a negative impact on your credit and negative reporting stays on your credit report for seven years.  You may be able to negotiate with the creditor how it will be reported with the credit bureaus as part of any settlement agreement.

There are also tax consequences you should consider.  Forgiveness of a portion of the debt, known as “cancellation,” may be treated as “income” to you, and under federal law, the creditor is supposed to issue a 1099c to you for the amount of debt that is cancelled.  If this occurs, you should consult with a licensed tax preparer or tax attorney for advice.

If you have determined that you need experienced legal representation, please call 480.733.6800 and ask to speak with Lori Curtis, or visit our website at Davismiles.com