Can I Settle My Credit Card Debt With a Lump Sum?

Debt That Can Be Settled

If you are going to attempt to settle credit card debt for a lump sum, you must be delinquent on this debt. A bank or credit card company has no interest in settling your account if it is current. They would rather you keep paying so they can keep charging you interest. Generally any unsecured, delinquent consumer debt is a candidate for you to settle for a lump sum with a creditor. The creditor will want you to pay cash for a settlement, probably within 10 days of you reaching an agreement.

Settling a debt for less than you owe will be devastating to your credit, similar to the debt being listed as included in bankruptcy. Creditors are taking a loss and will report it this way. However, they know that they are not likely to collect this account in full, so they are happy to take some money now. You will receive a federal form 1099 for the forgiven amount of debt and you will be responsible for income taxes on this amount at your regular tax rate.

If you have many debts and you are delinquent on all or most of them, bankruptcy may be a better option. According to Nolo.com, you are not responsible for taxes on debts discharged in bankruptcy, and it could be less frustrating than dealing with creditors and collection agents. It also may be a good alternative if you do not have money to offer lump sum settlements.

If your accounts are current, you may be able to negotiate a lower rate, extended payment terms, or receive other benefits from your creditors. Bank of America, Capital One, Discover, American Express, Citi, and Chase are reported to be offering incentives and help for their customers. Each company has its own guidelines to qualify for these programs.

Communicate with the creditor about your desire to settle. How much you will settle for depends on the time that the account has been delinquent, but most experts say that 50 percent is average. Begin negotiating at 20 percent on the first phone call. If the creditor does not agree to the offer, end the phone call and try again in a week or so. Eventually, they are likely to listen and you will reach a settlement. Be sure that you have the cash to pay what you are offering in a settlement.

Tell the creditor that you need the settlement agreement in writing prior to sending any money. When you receive this notification, go to the bank and get a certified check or money order and mail it. Keep a copy of the payment with the settlement agreement and file them. Plan to keep them forever as proof. Do not give a creditor access to your checking account.

Never use a debt settlement company that wants you to pay a fee up front. These companies are often scams, and the FTC is cracking down on this type of debt settlement.