When you're upside down on your credit debt but you don't want to go to bankruptcy court, it's time to consider credit card debt settlement. This is an option that can get you out of much of your debt without the financial penalties of bankruptcy.
So what is debt settlement? It's a type of negotiation in which you and your creditors bargain over how much debt you'll repay. You agree to pay back a portion of the underlying balance, usually about 40 to 60 percent, and the creditors agree to release you from what's left.
Credit card debt settlement works best for people who find themselves stuck on the so-called "credit treadmill." This is when you've charged enough to build up an outstanding balance you can't pay off, leaving you stuck making the minimum monthly interest payments month after month with no end in sight. Consumers on the treadmill typically have two options: bankruptcy or debt settlement.
With the economy stalled and jobs hard to find, more and more consumers are stuck with monthly payments they can't afford. At the end of 2010, by illustration, the average American consumer owed $4,200 in debt. For many consumers, credit card debt settlement is the best possible way out of the hole. Not only does it give them a clean break, it doesn't typically do the kind of credit damage that bankruptcy does.
Creditors are also more open to debt settlement than ever before. The economy has already forced them to write off growing numbers of defaulted accounts, so they have little interest in seeing consumers go into Chapter 7 bankruptcy and liquidate their debts. In their ideal world, creditors would like to keep you stuck on the treadmill making monthly minimum payments, but given the choice between settlement and nothing, creditors will take settlement much more often than they used to.
It's possible to settle credit card debts with or without help, but doing it without help brings significant disadvantages. You won't have much bargaining power as an individual, for one thing, and you won't have anyone to help you deal with the bureaucracy of the credit card companies. Plus, there are many lenders that won't deal with individual consumers.
Alternatively, there are debt settlement companies that offer their services to consumers who want a professional advocate to represent them in negotiations with creditors. These settlement companies have the advantage of doing regular business with the credit card companies, which means they can bargain for cheaper settlements than consumers could get without help. They can also help consumers navigate the red tape of the credit card companies and handle collection calls.
Here's what you'll do once you hire a company to negotiate debt settlement for you: You'll stop paying the credit companies every month and instead you'll put the money into an account where it will be used to pay off the credit card companies once they agree to settle your debts. It will also be used to draw them to the negotiating table, since they won't settle with consumers who are still paying them.
Any decisions you make about your debts carry risks, including debt settlement. Informing yourself about those risks is key. Debt settlement companies are regulated by the Federal Trade Commission, which provides protection from fraud and abuse.
If you're stuck on the credit treadmill, knowing there's no way you can pay back everything you owe and no way you can keep paying the monthly minimums, you should consider negotiating your debts. Credit card debt settlement could get you out of the hole and save you from the pain and financial constraints of bankruptcy.
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