For some people, attempting settlements on your outstanding credit card debt is a great solution.
For others it is not.
After working in the debt settlement industry for over 15 years, I have a pretty good idea of who’s a good candidate for the debt settlement process and who is not a good candidate.
Here's the actual screening process we use at Donaldson Williams:
3 Main Criteria For The Debt Settlement Process
If you want to attempt settlements with your creditors there are 3 main criteria you must consider. If you do not meet one or more of these criteria, you should view that as a major caution flag.
Criteria # 1: Legitimate Financial Hardship
No bank or credit card company is going to write off thousands or tens of thousands of dollars for no good reason.
Nor should they.
I think most people would agree that if you have the ability to pay then you should honor your financial obligations.
However, if you can honestly say that you’ve done your best pay as originally intended but you’re still coming up short financially, then it’s perfectly ok to approach your creditors about negotiating settlements for less than full balance.
Handled appropriately, a settlement can be the best thing for you as well as your credit card company.
So what’s constitutes a legitimate financial hardship?
- A messy and expensive divorce where you received an unfavorable ruling from the judge and/or got hit with substantial alimony or child support. To make matters worse, you still owe a bunch of legal fees to your own attorney.
- You lost your job because your company downsized and your job was eliminated. Maybe your job was outsourced overseas. Maybe your company went bankrupt. Whatever the case, you’re now without a job.
- You’re self-employed and you have an unexpected heart attack and you need emergency quad-bypass surgery. (This really happened to one of my former clients.) So you have surgery but you can’t really do much for the next 6 months while you’re recuperating. In the meantime, your business goes to pot and your cash flow is a fraction of what it was previously.
Let me give you 2 examples of what are not legitimate financial hardships:
- Let’s say things are a little tight financially. You can squeak out the monthly payments but you’re just mad at your credit card company because you feel they’re charging too much interest or you got hit with some late fees because you didn’t send in last month’s payment on time. So now you don’t feel like paying because all of a sudden you’ve decided your credit card company has policies and procedures you don’t agree with. Yes, certain credit card companies have policies that might be “questionable”. But if you’re not disputing any of the charges and you have the ability to pay, then as much as you might not want to hear it, you do have a legal responsibility to honor your outstanding debts.
- A death in the family. Yes, the death of a family member is obviously traumatic, but in most cases it’s not going to be the cause of having financial difficulties.
The reason why it’s important you really did suffer a legitimate hardship is because ultimately you’re going to have to explain everything to the credit card company as to the reason(s) why you’re asking them to forgive a portion of the debt that you owe.
And good luck trying to explain why you need 9 flat-screen TVs, one for every room in your house, including bathrooms. That’s going to be a tough sell.
Now you know what constitutes a legitimate financial hardship and why it’s an important component of the debt settlement process. Because if you’re seeking debt relief, sooner or later you’re going to have to explain what happened.
Criteria # 2: Must Have Sufficient Funds To Work With
You can be the nicest, sweetest, most well-intentioned person in the world … but if you have little or no money to work with there’s not a whole lot that can be done.
That’s just the cold, hard reality.
So how much is it going to take to settle your credit card debt?
Obviously it’s impossible to say to the exact dollar. But I can give you a pretty good estimate that will get you in the ballpark.
The rule of thumb is that if you know what you’re doing and you manage your situation properly, in most cases you should be able to settle your debts for $0.50-$0.60 on the dollar (or less).
That means if you have $100k of credit card debt, you should be able to get it settled for $50-60k or less. If you have $40k of credit card debt, you’re probably looking at $20-24k or less to get it settled.
The final numbers could be slightly higher or lower. All I’m trying to do is give you a good conservative estimate for what it usually takes to get the job done.
The next logical question is, “Where do people actually get the money for settlement purposes?”
I know we all wish we could just win the lottery. But the statistical likelihood of winning the lottery is not real good.
So where do people come up with the money for settlement purposes?
One of the most common ways is called “love money”. From people that love you. Family or friends that want to help you out.
It’s not like you go to them and say, “Hey, will you bail me out?”
Instead, love money usually comes in the form of a personal loan. Then after your debts are settled you make arrangements privately with that friend or family member to pay them back.
If you’re lucky enough to have a rich uncle that’ll just give you the money and you don’t have to pay him back … well, God bless your rich uncle.
Either way, whether it’s a gift or a loan, love money is one of the most common sources of funds for settlement purposes.
Another common way to gather settlement funds is with a home equity loan, home equity line of credit or a cash-out refinance.
Another common method is to liquidate or take out a loan against a retirement account.
Yes, you might have to pay taxes or penalties for early withdrawal of funds from a retirement account. But you might conclude that the amount of debt relief that you could obtain would far offset any taxes or penalties that you would incur.
Normally it’s a good idea to avoid tapping into a retirement account if at all possible, because a retirement account is intended for … retirement.
But if you’re strapped for cash and you desperately want to wipe out your excessive credit card debt, this might be a sacrifice you’re willing to make.
Another option would be to sell something. A car, a boat, a Harley-Davidson, a piece of property. If possible, maybe you sell your existing home and downsize to a less expensive home (or rent) to free up some cash.
Another option would be to simply accumulate money month after month from your paycheck, because not everyone has the luxury of a family member that can loan or gift them a lump sum of money for settlement purposes. And not everyone has stuff that they can sell. So this might be your only viable option.
The bottom line is this: If you want it bad enough, you can usually find a way to come up with the money. Not always, but usually.
Criteria # 3: Proper Timeframe
How long should the debt settlement process take?
Not a day longer than is absolutely necessary. You want to get this process done and over with as quickly as possible.
Here’s why:
- Interest and late fees will continue to accumulate. Just because you want to attempt settlement for less than full balance, that unfortunately doesn’t obligate the credit card companies to freeze your outstanding balances. The meter continues to run, so to speak. And if the debt settlement process drags out to 18-24 months and beyond, you do the math and you’ll quickly see that the resulting balances can become pretty substantial. Please understand, I’m not defending the credit card companies about them continuing to add interest and late fees. I’m merely stating a mathematical and contractual fact that your balances will continue to grow until your account is resolved. So you have to be aware of this.
- Minimize the chance of getting sued. Certain creditors are more impatient these days than they used to be, and they’re no longer waiting around 2, 3 or 4 years for you to resolve an outstanding credit card debt.
I realize it might take you 6-12 months, maybe even 18 months, to gather the necessary funds for settlement purposes. And that’s fine.
All I’m saying is that you want to try and get through the debt settlement process as quickly as possible.
Not only to keep the interest and late fees manageable, but also to keep the risk of litigation to a minimum.
Is there a maximum timeframe for the debt settlement process?
There’s nothing set in stone. But I would strongly recommend a timeframe of 12 months or less, if possible. The sooner, the better.
If you can complete the debt settlement process in 12 months or less AND meet criteria #1 and # 2 above, then there is a very high probability of success.
But if you know right now that you are not going to be able to pull together the necessary funds for settlement purposes within 12 months or less (18 months tops), then it is my opinion that you should not proceed with the debt settlement process. And instead, bankruptcy or some other option might be the better way to go.
Other respected professionals in this industry agree with me on this timeframe.
3 Main Drawbacks of The Debt Settlement Process
Drawback # 1: Collection Calls
You ARE going to receive collection calls from creditors. There’s no way of getting around this.
It’s one of the by-products of attempting to settle your credit card debts for less than full balance.
Creditors are legally entitled to contact you about past due balances.
Some companies claim that if you hire them they’ll be able to put a stop to collection calls from creditors. Unfortunately those days are long gone. The last time I remember any creditors voluntarily stopping collection calls was around 2002 or thereabouts.
If you’re seeking thousands (or tens of thousands) of dollars in debt relief without filing bankruptcy, you are going to have to put up with collection calls for a few months. It’s just part of the process.
While we’re on this topic let me comment on the infamous “cease & desist” letter — the magical letter that will supposedly solve all problems with debt collectors.
I can sum it up in 3 words: Very. Bad. Idea.
Anyone that’s work in the debt settlement industry for say, about a week, would know that you should not use a cease & desist letter. Credit card company laugh at cease and desist letters. With certain credit card companies, a cease and desist letter is a *trigger* to fast-track your account to their litigation department.
So unless you want to increase the odds of getting sued, do not use a cease & desist letter.
Also, if your ultimate goal is to negotiate a settlement for less than full balance, why would you want to cut off all lines of communication?
Answer: You wouldn’t!
If you’re seeking debt relief through negotiated settlements, just accept the fact that you’re going to have to deal with some calls from debt collectors. It’s not the end of the world and eventually you’ll get through it.
In fact, we have a free download outlining steps you can take to keep debt collectors at bay. Here’s the link
Drawback # 2: Possible Litigation
You could get sued.
What surprises most people, though, is the statistical likelihood of getting sued over a credit card debt is minimal.
Historically, with the clients we’ve worked with the litigation rate is less than 2%. For the past few years the litigation rate has been less than 1%.
So do some people get sued? Yes, absolutely.
But the reality is the vast majority of people with past due credit card debt do not get sued.
Some debt collectors would like you to believe that everyone is going to get sued because that’s one of their more effective tools for coercing people into paying.
But remember, lawsuits take time and money. And it’s just not economically feasible for credit card companies to sue everyone. That’s why they do settlements for less than full balance.
Under the right circumstances, it’s better for the credit card company to cut their losses and settle rather than waste a bunch of time and money suing someone they might never collect from.
If you’re trying to settle your credit card debt, it’s important to understand that they possibility of getting sued does exist. But it’s equally important to keep the risks in proper perspective.
It’s kind of like flying on an airplane. Do planes crash from time to time? They do. Every time we get on a plane we do so with that understanding. But we still fly anyway because we know the risks are minimal and it beats the alternative of driving or taking a train.
Drawback # 3: Damage To Credit Report
Your credit report WILL be adversely affected.
This is a big issue for a lot of people but there’s also a lot of misunderstanding about this topic. So let’s clear things up.
The bottom line is this … you cannot settle your debts for less than full balance they shortly thereafter expect to have good credit. That’s fantasy-land. The credit scoring system does not work like that.
Your credit report is going to be negatively impacted by going through the debt settlement process. Any reasonable person understands and accepts this.
It’s a trade-off.
The critical question to consider is this, “If you could obtain substantial debt relief (i.e. thousands or tens of thousands of dollars), are you prepared to have less-than-perfect credit for a few years?”
If the answer is “yes”, you’re looking at things honestly and objectively. If the answer is “no”, then you should not proceed with the debt settlement process.
To maintain a good credit score you’re going to have to pay your creditors in-full as originally agreed. Anything less than that is going to result in less-than-perfect credit. Period.
There’s really no other way to say it. It’s that cut and dried.
I am fully aware there are sites on the internet that claim you can “negotiate” how a settlement will appear on your credit report. However, as someone that has actually worked in this industry for over 15 years, I am here to report that things do not work like that.
It’s hard enough to persuade a creditor to accept less than full balance, and credit card companies are not going to “cut a deal” with you and manipulate your credit report in return for payment.
They can’t.
Credit card companies are legally obligated to report the truth, pursuant to the Fair Credit Reporting Act (FCRA). So if you do a settlement, the truth is you settled your account for less than full balance and that’s what will show up on your credit report.
Here’s a little known fact about less-than-perfect credit …
You can live just fine with less-than-perfect credit. You’re not going to be a social outcast and you will be able to function in society just fine. The whole illusion that you cannot live without good credit can be hard to break free from because we’re constantly bombarded by advertisements and commercials that might or might not have your best interests at heart.
In summary, there’s a trade-off. If you are seeking voluntary debt relief by negotiating settlements for less than full balance then you’re going to have to accept that your credit will be adversely affected.
Conclusion
Deciding on credit card debt settlement is a significant step towards financial recovery.
It's essential to weigh the pros and cons, considering your unique financial situation.
If you're facing a genuine financial hardship and believe debt settlement could offer a path to regaining financial stability, the next step is to have a brief phone consultation with a debt settlement expert so they can answer your questions and help you navigate the process effectively.
