Credit card debt reduction analysis to help learn how to eliminate your credit card debt.

Bankruptcy Alternatives / Debtor's Options

Credit Card Debt Reduction & Settlement FAQ

Presented by Mory Brenner, Esq.

  1. What is the different between a debt workout and a debt consolidation for reduction or elimination of credit card debt and other unsecured debt?
  1. For the context of this discussion I refer to a credit card debt workout as a negotiated settlement of credit card debt. For example if you owed $5,000 on a credit card and made an agreement with the credit card company to pay $2,000 instead of $5,000 as settlement in full on the debt, this would be a credit card debt workout. Firms who perform this type of work may identify themselves as debt management, debt reduction, debt relief, debt workout, debt settlement or a host of other names inferring they help with debt even sometimes including debt consolidation. However, I personally define the specific term debt consolidation as a reorganization of the debt through a credit counselor or taking a debt consolidation loan to pay of the debts in full. Where those with credit card debt achieve debt relief by paying less than they owe I like to call it debt settlement. Other FAQís at Bankruptcy Alternatives address each of these debt elimination options individually or read summaries of options at Debt Help Solutions.
  1. Who is eligible for a debt workout to get out of credit card debt?
  1. Creditors agree to debt reduction arrangements where they feel a settlement of the debt will be in their best interest. In most cases they come to this conclusion because the person requesting the debt negotiation appears to be a legitimate candidate for bankruptcy. Knowing that in most bankruptcy cases they would receive nothing, they opt to take a discounted settlement on the debt rather than receive zero dollars in a chapter 7 bankruptcy. The consumer gets debt relief, the creditor get some money, and everyone ends up better than their worst options.
  1. What kinds of people appear to be bankruptcy candidates to the creditors?
  1. 1. People who have shown an inability to pay their debts as evidenced by their failure to make payments for several months on their credit cards and other obligations. In other words, those who already meet the definition of bad credit.

2. People who do not have assets to protect such as equity in homes and cars.

3. People whose current or future income would not allow them to reorganize their finances either through a Chapter 13 or a plan outside of bankruptcy.

  1. How do the creditors find out about this information
  1. When you applied for credit, in most cases, you authorized the creditor to inspect your credit report when necessary. As part of the collection process in determining proper resolution option for your debt most creditors will run a credit report. The creditor obviously knows of your own debt payment history with them. The credit report will allow them to see how you are treating all of your other creditors. For example if you have ten credit card accounts and are current with all of the others they will make the assumption that you are capable of paying them as well. On the other hand if you were delinquent with all of your other credit card debts it would seem to indicate that you do not have the ability to pay anyone including that particular creditor and you indeed require debt relief.
  1. How could they find out about my income and assets?
  1. As a starting point they will use the application that you used to obtain the credit card in the first place. Beyond that, although there are some public records and some information on a credit report. For even more data you will have to provide the creditor with this information yourself. Some creditors will never ask for this information, others will ask for it before any debt reduction negotiation begins and others will ask for it depending upon the status of the debt reduction negotiation.
  1. What would trigger them insisting on my income and asset information as a part of the debt settlement negotiation?
  1. Imagine that after only seeing a credit report and some preliminary information the creditors make what you might consider a high debt settlement offer such as 75 cents on the dollar. In order to persuade them to take a debt settlement less than their initial offer they might demand further evidence of your financial hardship including financial statements indicating income and assets. Then, with evidence in hand proving the personís lack of ability to repay the debt, to the creditor may consider a debt reduction allowing a pay off of the debt in a much lower range. The bank may accept that you need debt relief, but even than they take the stance that they want to give you only as much debt relief as you might need to avoid bankruptcy and no more.
  1. Would a typical credit card debt account accept to pay off the debt?
  1. Most of credit card debt accounts settle in a range of 30 to 50%. Be aware that some credit card debt accounts may settle considerably higher reaching into the 75 to 80% range while in rare cases credit card debt accounts can be settled in the 20 to 30% range. In very rare cases I have seen debt solutions agreed to for as little as 5 to 10% or as much as 90 to 95%.
  1. What would determine differences in the debt reduction amounts?
  1. While a personís own financial situation would have an important effect on debt reduction figures the next most important factor would be the internal debt settlement policy of the creditor. Prediction about the internal policies of these creditors cannot be made on their size or the amount of the debt necessarily, but they are consistent in their own policies. For example MBNA, American Express and Citicorp may all be major players in the industry and all of a large size but their policy on debt settlements are quite different. On the other hand the way American Express treats each of their own customers individually is fairly consistent in terms of their own internal debt settlement policies. Therefore someone who works with these creditors everyday would know what to expect from each individual company when putting together a debt management plan.
  1. Do credit card debt settlements need to be made all at once to achieve debt elimination?
  1. With most settlements you do need pay off the each individual credit card debt all at once in a lump sum by paying the creditor the reduced debt settlement figure they have agreed to with your debt negotiation firm. There are two significant exceptions that debtors should be aware of. First is that in some cases the creditors will arrange a short payment plan, especially with larger amounts of credit card debt. These plans might range any where from three to six months to pay off the credit card debt. The other exception comes in the form of special debt management or debt reduction companies, which arrange to stretch debt settlement plans out of a period of one to four years. These debt relief companies will be discussed later in this article.
  1. How does this type of credit card debt workout affect someoneís credit?
  1. It depends on the status of the debtorís credit before the debt workout. Letís imagine that credit report scores run on a scale of one to 10, one being the best. Only ranks of one and two are good enough to walk into most local banks to get a loan or credit card. Someone who has done a credit card debt settlement would be considered near a six on this scale immediately after the pay off of the credit card debt settlement. For someone who started as a one or two this would be a dramatic devastation of their credit. Anyone with good credit should consider the debt workout as an option very seriously before undertaking it, as his or her credit will be essentially destroyed. On the other hand, if an individual already shows multiple accounts on their credit report that have been charged off by creditors they may already have a credit score of approximately nine on a scale of one to ten. For these people settling the charge off accounts through debt settlement would actually improve their credit. This does not mean it will make their credit good, it just means it will improve it from very very bad to only plain bad.
  1. Can a person achieve these credit card debt settlements on their own or do they need to hire a debt reduction professional to get out of the credit card debt?
  1. While it is certainly possible for someone to achieve a credit card debt settlement on their own I do not recommend it anymore than I would recommend somebody taking out their own appendix. In the first place creditors do not take the situation nearly as seriously when a debtor calls to make a settlement as when a debt relief professional, such as a bankruptcy attorney or debt management firm calls to make a debt settlement. An individual would not know how to negotiate a debt settlement or what a proper debt settlement would be. A debt management professional working in this field would know most individual creditors including what their standard acceptance offer would be. In order to achieve the proper credit card debt settlement it is important to understand the proper way to fill out certain financial forms, most individuals do not know how to do this properly. A debt reduction professional also knows what to say, what not to say, what to ask for and what, to a creditor, would be a ridiculous request. Credit card debt settlements are best achieved when the creditors standard operating procedures and formats are followed. An individual would have no idea how to go about following such debt solution procedures. It is harder to negotiate one of your own credit card debt accounts because of the emotions involved when negotiating for yourself. Even amongst lawyers it is said that the lawyer that represents himself has a fool for a client. This is the case for either a lawyer or non-lawyer negotiating debt settlements on their own behalf. When someone else is negotiating for you the calls from the collector and letters end up going to the debt management professional you have hired to work for you making the entire debt settlement process less stressful. It is disturbingly common for debt collectors to try and do things, which may be industry tricks or potentially fraud in order to get you to pay off debt in full. Some of these things may include getting you to reveal information about yourself you may have no obligation to reveal or having you to send money you have been told would be settlement of the debt in full only to find they have lied and simply taken the money on account.
  1. What if the creditor initiates a credit card debt settlement offer directly to the debtor?
  1. In most cases the first debt settlement letters coming from the creditors are initial attempts to make contact the debtor combined with a debt settlement offer that the creditor deems high, but certainly one the credit card company would be happy to accept. A typical case would be a creditor offering a settlement of 75 or 80 cents on a dollar. In almost all cases debt settlement can be achieved for less than the offer made in these initial contact letters from the credit card companies.
  1. What if I have gotten a series of letters from the credit card company and the offer keeps getting better, at what point should I take it as a viable debt elimination solution.
  1. This answer depends on the creditor. A debt reduction professional working in this field would know the answer based on the specific creditor. With certain creditors I found when the offer gets low enough, although better settlements can be achieved, when one looks at the fees to pay the debt reduction professional and the difference in the debt settlements the end result is fairly close. In these cases I have personally told clients to except offers and make sure they followed the proper procedures. Although I must say those cases are quite rare. You also need to watch out for what the letters really want. While they may look like an offer of debt relief, sometimes offers to accept a small payment as a deposit toward settlement are designed much more to extend the statute of lititations more than make in dent in your cardit card debt. Other firms may send what looks like a settlement only to inform you that what you paid represents a partial payment on the total debt and the entire amount remains due in full.
  1. How long does the card debt settlement process take?
  1. A normal credit card debt settlement case might take three to nine months. If someone wanted to expedite the situation it could be shortened to one to three months. Someone wishing to stretch things out could find the time extended to twelve to eighteen months. Some special debt management and debt reduction firms can even lengthen the process to four years or more.
  1. Why would someone want to stretch the credit card debt negotiation process out longer?
  1. In order to get more time to get debt settlement funds accumulated. For many people the only options to get out of debt are four-year settlement times or bankruptcy.
  1. Are there any downsides to lengthening the credit card debt negotiation process?
  1. 1. As time goes on interest builds on the outstanding credit card debt. Even if the credit card debt ends up being settled for 50% interest building at 20% on the total outstanding credit card debt still means a significant increase in what you will pay as a debt reduction settlement.

2. At some point you will want to begin rebuilding your credit. This process cannot and should not begin until all of the old credit card debts have all been settled.

3. Laws, your own personal situation or creditor policies can change so that a credit card debt settlement, which might be archived now, can no longer be reached in the future.

4. The longer things go after the credit card company has started litigation in the court system the more likely it becomes that a creditor will refuse to participate in your debt settlement plan and you must settle a credit card account for more than you might want to or you will face a court hearing and its consequences such as garnishment.

  1. How do these debt settlement firms work to get you out of your credit card debt over a term of years?
  1. First they access your own financial situation to determine if you would be a good candidate for their debt settlement program. Be aware that some of these debt reduction firms will try to get you signed up because that makes the debt management firm money, not because it truly represents the best debt solution route for you. To help figure out what might be best for you to reduce debt I have written the Debt Advice Free software system.
  1. Suppose the debt settlement option does work best for me and itís what I want to do to pay off the credit card debt and achieve debt relief.
  1. Together with the debt settlement firm you will establish a master plan to help deal with the credit card debt including how long the debt elimination process might take, and how much money you will need to make the credit card debt reduction plan work.
  1. Who do I pay to get out of my credit card debt and when do I pay it?
  1. This varies with each debt management company. All credit card debt reduction plans will provide both for payment to the creditors and payment to the debt settlement firm. Payment to the debt relief firm can be on a flat fee basis calculated as a percentage of the total debt or a percentage based on the money saved through debt settlements. Payment of these debt reduction fees can be paid up front, over time, or when debt settlements are reached. Money to pay the creditors can be kept by the debtor until it may be needed or held in escrow by the debt negotiation firm. In many cases these debt settlement funds build up by the debtors adding to them each month.
  1. Is it better to accumulate credit card debt settlement funds on my own or allow the debt management firm to keep them in escrow for me?
  1. Before answering that question debtors should be aware that with many of the credit card debt reduction firms how to accumulate the debt settlement money would not be an option. Some debt relief firms require everyone to accumulate money on their own while other debt help firms require their own organization hold the debt settlement monies in escrow. The question of which method to use will be applicable only with those debt negotiation firms who offer the choice. This information may also play an important role in selecting which debt elimination firm to use. For example if a debtor feels very strongly about how to accumulate the debt settlement monies they may want to only contract with a credit card debt settlement firm that handles the escrow using the debtorís preferred method. With that in mind I will outline the proís and conís of each method, but which will work for any given individual debtor will vary on the debtor's own circumstances. Holding debt settlement money in escrow yourself eliminates any worry that a stranger you have entrusted with your funds will miss-handle them or be abscond with them. On the other hand for many people the greater danger lies in holding the debt settlement funds themselves. Because rather than accumulate the money to be used for a settlement of debt as intended, they themselves will use the funds for other purposes. Even usage of the debt settlement funds for purposes they may feel valid at the time will still result in there being no funds for debt settlement when the need arises.
  1. How do these credit card debt reduction firms stretch pay off settlements out over a term of years?
  1. This results from a combination of waiting for the creditors to start an action, long term and high volume relationships between the debt management firm and the creditor and various other trade secrets of the debt reduction firms.
  1. Is what the debt relief firms do work out long-term debt payment plans to pay off the creditors?
  1. Not really. More commonly the debt management firm or the debtor accumulates debt settlement funds until a particular credit card debt can be paid off at a negotiated discount. Then that one credit card account gets settled and the process repeats until all credit card and other unsecured debts in the debt management plan have been taken care of.
  1. Who decides which debts to settle first?
  1. While the debtor and debt settlement firm work on this together the decision frequently ends up being decided by the creditor who seems to be closest to starting litigation to collect their debt. Remember that good debt relief firms do quite a bit of this type of settlement, so they usually know in advance which of your particular creditors might get aggressive and when.
  1. Can these credit card debt reduction firms stop creditor law suits the way a bankruptcy filing can?
  1. No. Debt management firms can only stop credit card companies by having them agree to a negotiated debt settlement or a delay in the litigation. They cannot force them to do anything.
  1. What happens if the creditor wants to proceed in the courts to collect the debt?
  1. In most of these cases the impending court action acts as a catalyst the speed a debt settlement; in some cases the pressure even produces higher debt settlement figures for the creditor. In some cases the creditor gets a judgment but nothing else happens. In some cases the creditor gets a judgment and attempts a wage garnishment or other further court action to get the debtor to pay off the debt. In some cases the court action forces the debtor into filing a chapter 7 bankruptcy or a chapter 13 bankruptcy as a debt solution.
  1. I'm talking to a debt settlement company that claims they can stretch the debt elimination plan to five years and, in fact, that most of their debt reduction plans run five or even six years. The longer plan works much better for my finances, why shouldn't I go with a debt plan like that?
  1. First, most credit card debt situations can only be settled over one to three year time frame. After that most creditors will begin law suits which lead to wage garnishment and worse. Many debt negotiation firms claim they can make a settlement plan that you can pay over five years. Take that claim as a sign you might be talking to a disreputable debt settlement company. Second, if your budget dictates that you need to put the debt settlement payments over five or six years to make a debt elimination plan work than you should look at adjusting your budget or examining other options for dealing with your credit card debt, perhaps even calling a bankruptcy lawyer.
  1. How much do these credit card debt reduction firms charge?
  1. On average I find rates for credit card debt reduction firms range from 8%-15% of the total outstanding debt. Some credit card debt relief firms will calculate the fee based on what they save the debtor through their negotiation with the credit card companies based on a fee of 25%-33% of the savings.
  1. Do these credit card debt reduction firms guarantee their results?
  1. Not in most cases.
  1. Do these credit card debt management firms generally do what they say they can?
  1. At least with the credit card debt management companies I have worked with, they almost always achieve debt settlements with the creditors. In the vast majority of cases the debt settlements come within the estimates given by the credit card debt relief firms as well.
  1. What happens when the credit card debt reduction company cannot settle an account?
  1. This almost never happens. Sometimes the credit card debt reduction firm will put an account off to settle it in the future if they think more time or a change in account status will produce a better debt settlement. Sometimes the credit card debt accounts settle higher than the projected range, but they almost always settle.
  1. When are the credit card debt management fees due?
  1. With some credit card debt reduction firms all in advance, with some debt relief firms over time and other debt negotiation companies only when things settle.
  1. What happens if I miss a payment to the credit card debt management company?
  1. Things can be much more flexible than they would be with a creditor but to stay on the plan you will have to make the payments.
  1. Can I still file a bankruptcy if I try the debt settlement and it does not work?
  1. Yes, but the money you will have spent on the credit card debt settlements prior to you filing the bankruptcy will be gone forever. This illustrates why you should try to make a master plan to pay off your credit card debt you can follow all the way through and stick to it until you complete it.
  1. Will I still get debt collection calls from the creditors?
  1. Creditorís debt collection calls should go straight to the credit card debt negotiation firm. Sometimes you will get a debt collection call by mistake and sometimes the creditors will try to sneak around the debt settlement firm. Once you have hired a credit card debt negotiation firm simply tell any creditor that does call you have hired a debt relief firm to help, give the creditor the debt settlement firmís name, instruct them to call your firm and politely hang up the phone. Do not engage in a conversation with the creditor or their debt collector.
  1. What if the creditors and debt collectors keep calling me even after I have told them to stop?
  1. They may become liable for damages under the Fair Debt Collection Act.
  1. After I pay the negotiated debt settlement amount can the creditors still chase me for the balance of the credit card debt later?
  1. No, that is what a credit card debt settlement is all about it represents full satisfaction of the debt, but having your paperwork set up properly so that you get the debt relief you expected shows another reason to have a professional debt relief company do the negotiation.
  1. Do these debt reduction firms only work with credit card debt?
  1. Debt relief firms may also work with medical bills, auto deficiencies or other similar unsecured debt. Some firms offering debt management will only work with credit card debt. Student loan debt help is generally not available, and when student loan debt relief is available the only items for possible reduction in most cases will be the interest and penalties. Debt negotiation firms who work with secured debt such as mortgages and car loans do exist but most often are not the same firms who specialize in credit card debt. If you need advice on avoiding mortgage foreclosure you need some one who specializes in negotiating mortgage debt. That system operates in very different ways than a credit card debt settlement. To get more help with a foreclosure or mortgage debt read that FAQ or the free articles at Stop Home Foreclosure Help.
  1. How can I tell if a debt reduction program where they will settle my credit card and other unsecured debt accounts is the best way for me to get out of debt?
  1. I have put together an intelligent debt analysis program to see which of these debt elimination programs based you own personal debt, income and asset situation or you can fill out a form to have a debt settlement professional call to talk to you about their services. These firms do not charge a fee for initial analysis of your credit card debt situation. You may also wish to read about various solutions for your debt or use a form to use a form to hear from professionals providing various debt solutions and decide on the best plan after hearing what they each have to say. Keep in mind that to achieve successful long term credit card debt relief you must evaluate and change any bad personal spending habits to insure you don't end up in trouble again.

Credit card debt reduction analysis to help learn how to eliminate your credit card debt.

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