Sometimes credit card debt can get out of hand to the point where it is overwhelming and needs relief. Although you might see advertisements for credit card debt relief government programs, be aware these types of government programs do not exist and are scams. The government has steps to help protect you from these scams, such as the Fair Debt Collection Practices Act, but still be cautious. On a positive note, some legitimate debt relief options exist.
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What is debt settlement?
Debt settlement, sometimes called debt relief, can occur when you come to an agreement with your lender to settle the unresolved debt. The expectation with debt settlement is that the payment will likely be lower than the original and can be paid in multiple payments or one. However, like most things, you should consider the pros and cons of debt settlement before making your final decision.
- Getting rid of debt without bankruptcy
- No charge-offs
- Paying your debt off sooner
- Little to no power in negotiating debt payoff
- Debt settlement usually has high fees
- The negative impact on your credit score
How to settle debt
If you determine that settling your debt by using a debt settlement company is the best idea for you, the process is pretty straightforward.
First, verify the company you are using to ensure it is legit and not a scam. Verifying can be done by checking with your state attorney general or local consumer protection agency. You would be able to find out whether the company has any complaints and if it is required to be licensed in your state.
Once you’ve picked a company, you will work with it to renegotiate how much you owe. Remember that given the current state of your debt, you might not have much room to negotiate, but you may be able to get your debt balance down.
The debt settlement company will usually ask you to stop paying your debts. At the same time, it handles the negotiation of your payments. Not making payments could cause your debt amount to increase as fees and interest build.
There will likely also be fees associated with your debt settlement company handling your transactions. The entire process can be pricey, but in the end, the goal is to have your debt paid off. Some creditors might refuse to work with your debt settlement company, which could be challenging and cause you to work with your debtor directly.
Ultimately, your debt settlement company should be able to manage your payments behind the scenes. Keep in mind this process can be time-consuming, and your debt could get worse before it gets better.
Noteworthy debt relief options
Using a debt settlement company can be an option, but there are options to settle your debt that you can do on your own, too.
Credit counseling can provide free educational materials and workshops on money management while providing advice on managing your money and debts and help with budgeting your payments. Credit counseling services are usually free, or you can find low-cost options at credit unions, nonprofit organizations and in your community.
Negotiate with creditors or collection agencies
You can contact your creditors and collection agencies directly regarding your payments. They might be willing to work with you and possibly get you a modified amount that is more manageable, so you don’t need a debt settlement company.
Sometimes it makes more sense to file for bankruptcy than attempt to manage or settle your debt. Filing for Chapter 13 bankruptcy, for example, allows you to come up with a plan to pay off your debt while also keeping property such as your home or car. The courts are involved and come up with a payment plan that is paid off usually within three to five years.
However, filing for bankruptcy will negatively impact your credit, and it could take some time for your credit to be restored. Though filing for bankruptcy can stay on your credit for years, you can see some improvements to your credit within a year or so of filing.
How to manage your credit card debt
The best way to avoid debt settlement is to stay on top of your credit card debt. So take these steps to manage your credit card debt.
Make above the minimum payment
Making the minimum payment on your credit card is not the best practice. Typically, this payment will not get your credit card paid down quickly. Each month, try to pay above the minimum amount to get your credit card paid off sooner to help prevent the debt from becoming unmanageable.
Refinancing allows you to pay off your credit card debt with another loan at a lower rate. For example, depending on your balance, you might be able to refinance using a different card with a 0% annual percentage rate (APR) promotional period. Ideally, if you can’t pay the debt down before the promotional period ends, the APR should be lower than your current rate to help you pay it off sooner.
Stick to a budget
The best way to manage debt is to avoid it in the first place. Set a budget that allows you to manage your funds effectively while leaving room for fun. Setting a budget will help you depend on your credit cards less, keeping the balance manageable.
Get Your Debt Under Control
Your debt can seem out of control if you owe a large amount, but there are ways to get rein it in. That could include a debt settlement company or working directly with your creditor. Either way, seeking help from credit counseling or a debt settlement company could help you feel less overwhelmed. It is important to remember that scammers could be preying on others during this vulnerable time. Do your research to make sure you are working with a legitimate company.
How can I offer to settle debt with a reduced lump-sum payment?
You can negotiate directly with the creditor or use a debt settlement company to help negotiate your payment.
Is credit card debt forgiveness possible?
No, debt forgiveness is not possible, but you can settle your debt using companies that work with your creditors.
Does credit card debt forgiveness affect your credit?
If you use a debt settlement service, though you are working with someone to pay off your debt, you will see a drop in your credit score.