Why Do Credit Card Companies Go in for Debt Settlement?

Saturday, October 5, 2013, AM | Leave Comment

Credit card bills have always been a major source of debt for most clients. With more and more clients defaulting on their credit card payments, credit card companies are becoming more and more amenable to the concept of Debt Settlement. Through this process, many clients are paying off their debts through lump sum payments.

The most attractive feature of this is the fact that the debt amount is drastically reduced, sometimes to as much as 50 % of the total amount. Credit card companies have become much more accommodating about settling debts in recent times.

  • Change in payment methods

    There has been a change in how credit card companies are looking at debt settlements. Earlier, a reduced loan amount would be negotiated between the two parties and they would accept a lump sum amount from the clients. However, the scenario has changed wherein the borrowers pay a series of reduced monthly payments to the creditors instead of a lump sum like earlier times. The payments can range between monthly to quarterly payments. The term of the Debt Settlement could be six months, or even a year for the defaulting borrowers.

  • Credit card companies’ changed attitudes

    Earlier, credit card issuing companies weren’t so flexible in agreeing to debt settlement negotiations. The reason for the gradual change in their stance is the fact that the credit card problem has magnified to such an extent that they are being forced to look at more lenient methods of solving the problem.

    With the recession, all financial institutions have keenly felt the blow of unresolved debt. Companies are beginning to realise that through debt settlement they are being able to recover at least a portion of the money. Something is always better than nothing after all.

  • Things to consider before settling credit card debt

    While it is definitely a good sign that credit card companies are becoming flexible about debt settlement there are a few factors that need to be considered before you go in for negotiations.

    Firstly, look at your financial position. If you are well off with no money problems, credit card companies will not consider your applications. Problems like medical emergencies, unemployment, etc are precipitating factors for settlement.

    Secondly, consider the amount of money that you will need to pay off your debts. Will it leave you with enough to survive on a daily basis? Your settlement should not leave you high and dry.

    Debt settlement seriously damages your credit ratings. It sends a message to future creditors that you might be unable to pay off their loans as well. In serious cases, credit reports can be damaged for as long as seven years. So, in case you are planning to apply for another loan in the near future, debt settlement is a bad idea.

    Always remember that the amount that has been forgiven by the creditor doesn’t simply disappear into thin air. The difference in the settlement amount and the original amount is added to your income and taxed in the following fiscal year.

    However, if you are seriously up to your ears in debt, then settlement is definitely the best option to go for. Wait for the 5-month write off period and then contact the credit card company and start negotiating talks for a settlement. All companies have their own sets of rules and regulations. While some are more flexible, others are not. Usually companies can agree to a reduced loan amount up to 40-50 % of the original debt.

    Lastly, remember to hire a good settlement company for the negotiations.

About the author

Eileen has been working as a team leader in a Debt Settlement company for the past six years. She and her team have had hundreds of successful negotiations between clients and creditors. In her spare time, Eileen loves to read poetry.

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