14 Questions Nearly Everyone Asks (Or Should Be Asking) If They’re Considering The Credit Card Debt Settlement Process
I bet I know what your first question is.
How did I get into this credit card mess?
Don’t be too hard on yourself, though. Credit card debt problems can affect anyone. Young or old. Male or female. PhD or high school grad. Working or retired. Married or single. It doesn’t matter. Debt problems do not discriminate. Bad things really do happen to good people.
Sure, it would be nice to win the lottery and pay off all your debts by noon tomorrow. But we both know that’s probably not going to happen. Your financial challenges are not just going to magically disappear. You’re going to need to take corrective action.
The good news is that you have options. Although limited, options are always available, and you can indeed be free of debt.
Credit card debt settlement could be one of those options. But fair warning, it’s not for everyone. Yes, debt settlement has proven to be a great option for millions of people, but in order to complete a debt settlement program successfully, it’s important that you are a good candidate.
Here are answers to 14 questions that will help you determine, once and for all, whether or not debt settlement is the right option for you.
1. Is Credit Card Debt Settlement Really Legal?
Yes, credit card debt settlement is perfectly legal. You can hire an experienced professional to assist you; however, an attorney is not required to attempt voluntary settlements with your creditors.
2. How Does The Credit Card Debt Settlement Process Actually Work?
In the credit card debt settlement process, creditors and collection agencies agree to accept less than the full balance owed, via installment payments or a lump sum payment. Their motivation for doing so is “something is better than nothing” – at least with most creditors. If you and I have the opportunity to talk, I will explain this further.
Creditors and collection agencies are not stupid. They understand that if they push you into bankruptcy, they may recoup little or nothing and will have wasted both time and money pursuing you. To be candid, it’s largely about cutting their losses.
Be forewarned, however, creditors are not going to make it easy for you. They want the money they’re owed. Would you be happy about not getting repaid? Of course, we at Donaldson Williams make this process as painless as possible for our clients, and often act as a buffer between our clients and their creditors.
Rest assured, if handled professionally and correctly, most creditors will accept less than the full balance to settle outstanding debts.
3. Should I Use a Debt Settlement Company Or Attempt Settlement On My Own?
It is entirely possible to settle your credit card debt on your own; however, be prepared. Creditors and collection agencies can and do take advantage of consumers’ lack of knowledge and understanding of the debt settlement process, thus leading to creditors maximizing their receivables, and you paying more than you should for a settlement agreement. This means that you must have the knowledge, skill, time and temperament in order to do it well. If you feel you’re lacking in any one of these areas, you may want to consider hiring an experienced credit card debt settlement company to assist you. Also, most (those who are reputable) debt settlement professionals have established good working relationships with creditors, collection agencies and collection law firms; let’s face it, sometimes it helps to know people.
Even when you include their fee, the net result is often as good or better than you could have achieved on your own … and the debt settlement company does all the “dirty work” for you, which can be quite time consuming. And believe me, it is “dirty work”. Keep in mind, creditors and collection agencies push the limits, sometimes violating the Fair Debt Collection Practices Act. Threats of lawsuits are common; as a matter of fact, some collection agencies even threaten jail time or wage garnishment. This can be quite intimidating, to say the least.
4. How Should I Decide Which Debt Settlement Company To Retain?
There are several ways.
- First, check online for positive reviews or testimonials from former clients … either on their company website or a 3rd-party review site. Obviously, an abundance of negative reviews should be a red flag.
- You should also check for a good rating with the Better Business Bureau. It’s not mandatory that they have a good rating with the BBB, but it’s another good sign.
- Also, a good debt settlement company will not hold your settlement funds in escrow. Instead, you will maintain possession of your own funds at all times, and your funds will only be released after a settlement has been obtained.
- Another caution flag would be a debt settlement company that requires exorbitant fees upfront before any work is performed. Instead, look for a debt company whose fees are contingent upon the results, and their fees are paid at the time of settlement.
- A good debt settlement company will be easily accessible, always responding promptly to any phone calls and emails from their clients.
- Finally, you should get a good feeling about the debt settlement company you’re considering to work with. If something doesn’t feel right, walk away. Trust your intuition. It’s usually right. For instance, if you feel as though they’re trying to talk you into something you’re simply not ready for, don’t cave; high pressure sales firms are in it for the money, not to help you.
5. How Much Money Will I Need to Settle?
It’s impossible to state exactly how much money will be needed for settlement purposes, but here’s a good estimate.
A general rule-of-thumb is you will need an amount equivalent to about 50% of your overall debt total. If you should choose Donaldson Williams to represent you, this amount includes our fees.
That means if you have $50,000 in credit card debt, you’re probably going to need about $25,000 to settle that amount. Note: You do not need this amount upfront, all at once. If you do, great. But it’s not required. The debt settlement process will take months (and in some cases a few years), and that will give you time to gradually accumulate funds for settlement purposes.
6. Will I Receive Calls From Creditors During The Settlement Process?
If you attempt to settle your debt on your own, yes, you can expect to receive calls from your creditors during this process. Unfortunately, creditors are still legally entitled to contact you about past due balances, even if you’re waving the white flag and attempting voluntary settlements.
There was a time in the past where creditors would stop making collection calls if asked. But those days are long gone. If you choose Donaldson Williams to assist you, we will keep these calls to a minimum; however, if you’ve decided to “go it alone” you can find excellent information regarding collection calls here.
The key is simply to try and keep your contact with debt collectors to a minimum as you go through the settlement process.
Caution: Certain websites claim that you can send a “cease and desist” letter to stop collections calls. This is a bad idea. Sending such a letter could actually prompt creditors to fast track your account for legal action. Kind of important, don’t you think? For that reason, “cease and desist” letters are not recommended.
7. Can My Wages Be Garnished?
Yes and no.
Many debt collectors infer that they will immediately garnish your wages if you do not pay your outstanding credit card balance. However, wage garnishment is not that quick and simple, and if you’re being threatened there’s a good chance it is simply that – a threat.
A creditor cannot garnish your wages until they secure a judgment against you in Court. And before a creditor can get a judgment against you, they have to win a lawsuit against you in your local jurisdiction. And to win a lawsuit against you, they have to hire an attorney, file a lawsuit with the Court, serve you with the lawsuit, etc, etc.
There are a lot of steps, as well as expenses, to pursuing you legally on an outstanding credit card balance. For that reason, most creditors would prefer to reach a voluntary settlement. In most cases, it just makes more sense economically to do so. As a matter of fact, we only see approximately 2% of our clients’ accounts go into litigation. Fortunately, even those 2% of accounts are always resolved, either via settlement or payment arrangements (depending on our client’s financial situation).
8. What Type Of Documentation Do I Need To Properly Settle A Debt?
You must always receive the terms of the settlement in writing before you release your funds to settle the debt. Always, always, always.
At our office, the mantra is, “If it’s not in writing, it doesn’t exist.”
In addition, the settlement letter should be clear enough where a 6th grader could understand it. If the settlement letter is sloppily written and the terms of the settlement are not 100% crystal clear, request that the creditor or collection agency rewrite the letter.
Only after you receive a satisfactory settlement letter should you release your settlement funds to finalize the matter.
9. Once A Settlement Is Reached, How Are The Funds Paid To The Creditor?
In the “olden days” (late 1990s, early 2000s) certified funds were sent to the creditor or collection agency via overnight courier to finalize a settlement. Today this method is rarely used any more.
Starting around 2004, the industry standard for transferring funds to finalize a settlement evolved to “check-by-phone”. This means that, upon your authorization, funds are transferred electronically from your checking account to the creditor or collection agency to finalize the settlement.
This is why it is so important to get your settlement in writing before you authorize the transfer of funds—to ensure the creditor receives only the amount stated in the settlement letter.
10. What Will Happen To My Credit Score As A Result Of The Debt Settlement Process?
Let’s cut to the chase … your credit will be temporarily damaged as a result of debt settlement process. Anyone who tells you otherwise is not being straight with you.
When you settle your credit card debts via negotiated settlements, there’s a trade-off. And that trade-off is credit card debt relief of thousands of dollars in exchange for less-than-perfect credit for a few years.
Having less-than-perfect credit is not the end of the world, and you can function in the world just fine. Besides, many would argue that it’s a better alternative than getting sued or having bankruptcy on your record.
Also, there are websites claiming that you can “negotiate” how a credit card settlement appears on your credit report. This might sound good on paper, but it simply doesn’t happen in the real world.
Creditors and collection agencies have a legal obligation under the Fair Credit Reporting Act to accurately report the facts. And if you settled your debt for less than the full balance, that is what they are required to list on your credit report.
I can tell you with complete honesty that we’ve had clients whose credit scores were sufficient enough to purchase a home within a year after completing our program. So, while your credit score will be negatively impacted, rest assured, it will rebound, and you’ll be able to go on as before, only you will be debt-free.
11. I’ve Heard That I Might Have to Pay Taxes On My Debt. Is that true?
It is possible that you will have to pay taxes on your debt, however you probably won’t.
The IRS code states that any amount of debt relief you receive from a creditor is treated as income. Therefore, if you settle a $10,000 credit card debt for $3,500, the $6,500 that was written off is treated as income by the IRS.
But the IRS code also states that if you were insolvent at the time of settlement, and your level of insolvency was greater than the amount of debt relief you received, you are not required to pay taxes on the amount of debt relief you received.
When you file your federal tax return, you must attach IRS Form 982 to notify the IRS of your circumstances.
12. How Low Will Creditors Settle?
Sure, everyone would like to settle all of their credit card debt for $0.25 on the dollar. But that’s probably not going to happen. In fact, it’s near certain not going to happen. Will some of your creditors settle this low? Absolutely, but remember you can’t expect all of your creditors to do so. This is simply not a realistic expectation.
Every creditor and collection agency has different policies and procedures for settlement. With certain creditors, you can achieve settlements of $0.25-0.30 on the dollar, but with a few creditors the best you might see is $0.50-0.55 on the dollar.
To complicate matters further, settlement policies and procedures change frequently. Everything’s in a constant state of flux.
Although we do not have a crystal ball and cannot predict the future with pinpoint accuracy, we have been working in the debt settlement industry long enough to have a large volume of data to draw upon. And based on our data, we can report that the majority of past due credit card balances (if handled correctly) can be settled between $0.30-0.50 on the dollar.
Naturally, no specific results are being implied or guaranteed. We are merely sharing data based upon what we have observed. As of this writing our current settlement average is 33.6% of the balance owed.
13. Why Shouldn’t I Just File Bankruptcy?
Maybe you should. Sometimes bankruptcy is the best option.
However, most people would prefer to not have bankruptcy on their record if they can avoid it.
- If you file for bankruptcy, you will have to appear in Federal Court at least once for a hearing.
- Bankruptcy is a matter of public record for anyone to see, including future employers.
- Bankruptcy could be problematic if your current job requires a background check or security clearance.
- Bankruptcy can also remain on your credit report for up to 10 years.
- In 2005, the bankruptcy laws were overhauled, making it harder for individuals to qualify for Chapter 7 (liquidation of debt). This means that more people only qualify for Chapter 13 (partial repayment of debts) where you will have a court-appointed trustee oversee your finances for several years.
14. What Other Options Are Available For Credit Card Debt Relief?
There are basically four other options:
- Do Nothing: While not very practical, doing nothing about your credit card debt could work in certain situations – like if someone is unemployed and has no assets creditors could go after. This might work temporarily, but creditors can always reappear at a later date once you’ve found a job or have assets.
- Bankruptcy: For the reasons mentioned above, filing for bankruptcy is often a last resort for most people. In addition, we have discovered that most people wish to avoid bankruptcy because they feel a moral responsibility to honor their debts, even if it’s paying less than what is owed.
- Debt Consolidation Loan: Obtaining a debt consolidation loan is another option. However, in order to qualify for a loan you need to provide collateral to get the loan in the first place—and many people simply don’t have sufficient collateral. Besides, even if you did qualify for a loan, you’re still going to have to pay that loan back. You’re not getting any debt relief by taking out another loan.
- Consumer Credit Counseling Service: Working with a consumer credit counseling service (CCCS) is another option. A CCCS is a non-profit organization that has an agreement with the credit card companies whereby you make one monthly payment to the CCCS, then they disburse your funds to your creditors. The CCCS can often lower your interest rates and prevent collection calls. But again, this option is not giving you debt relief. You will still have to pay your credit card balances in full plus interest.