There are a number of ways to get rid of credit card debt. The preferred method – of course – is to simply pay off the balance. The best way to do that is to put your money toward the card with the smallest balance, get it done and then move on to the next. But what if you just flat out don’t have the money to pay your debts? What can you do then?
Well, you might consider debt consolidation. If you work through a “non-profit” agency, they will negotiate with your creditors and come up with an agreed upon amount you will pay each month. Basically the agency acts as a middle man. You send a single check to them each month and they disperse the funds to your various creditors. The amount you pay remains the same throughout the process and the approach they use is a lot like the what I’ve described above: as each creditor is paid off, the “excess” money is divided up among the other creditors so that as time goes on more money is directed to each account. That being the case, you will see your debt load decrease slowly in the beginning with a noticeable acceleration in the end. The process usually takes about five years. The agencies charge a fee and although they are not able to eliminate interest altogether, they are normally able to negotiate lower interest rates and have the creditors wave late fees and the like as well. Nevertheless, you cannot forget they are truly working for the creditors not you. Working through a credit counseling group can bring success, but you must stick to it.
Another option is bankruptcy. There are two major advantages to bankruptcy over any other approach. One, you get the load off your back immediately and two, you can start rebuilding your credit right away. When you work through a credit counseling agency (consolidation), your credit report reflects your inability to handle the problem on your own throughout the entire five year process – and remains on your report for years afterward. Basically your credit report will be ruined for a dozen years or so. With bankruptcy you can actually start to rebuild your credit immediately after the deed is done.
A third option is debt settlement. To settle your debts means the creditor agrees to accept an amount less than the total you actually owe. You can work through a debt settlement company, but they will charge you a big chunk of money up front. Then, once the debts are settled, they will charge you a percentage of the amount they “saved” you. When the dust settles, you’ll find your total savings is much less than you expected. The fact is, it’s cheaper to settle your debts yourself. However, it does require a rather thick skin.
In order to settle your debts on your own, you will have to stop paying your creditors altogether (the same is true if your working through a debt settlement agency). No creditor will settle with you if you are still making payments. Moreover, you will have to remain in arrears for quite some time before they will be willing to negotiate with you. In the mean time you will be inundated with collection calls and live under the constant threat of suit. If you can dodge your creditors for a year or more (the longer you go without making payments the more likely they are to settle), then they will probably be in the mood to settle. In fact, the collection calls will begin to take on a new note as the creditors tell you that they might be willing to settle the debt for a lesser amount – but if you don’t accept the offer, they will take you to court. At this point you can begin to negotiate an amount that you are able to pay.
Normally the creditors will offer to settle for about 80% of the balance. Depending on how long you’ve been in default, they may agree on a lower percentage. In any case, they will want the agreed upon amount all in one payment (sometimes two or three payments if they are desperate). That being the case, unless you’ve experienced some good fortune since the debt went to collections, you may not be able to pay the settlement anyway. If you’re in that boat then bankruptcy may be your only option. One more thing: before you send them a dime, be sure that you have the settlement in writing. You may want to have your lawyer look it over. Just be sure you have everything in black and white before you send the creditors a money order (take notes of every conversation you have with a creditor or collector). Credit card companies have been known to conveniently “forget” they agreed to settle a debt a few years after the fact.
As with any other discharge of debt apart from the normal payment process, settlement will make a hash of your credit report. The report will note that the debt was “legally settled for less than total amount.” However, as with bankruptcy, there is a way to repair your credit quickly once the last settlement payment has been made (more on that in a future article).