Five years ago, I found myself in a difficult situation with nearly $30,000 in credit card debt. My situation wasn’t the result of reckless spending; rather, it was the challenge of maintaining a life as a 30-something in Los Angeles while pursuing a career in the notoriously unforgiving entertainment industry. Add in a string of costly emergencies involving my car and my dog, and I was seriously considering bankruptcy.
Turns out I wasn’t the only one. Debt.com Survey The survey found that 35% of adults have “maxed out their credit cards due to rising inflation and interest rates in recent years,” and 22% have between $10,000 and $20,000 in credit card debt, with that figure rising to 41% for millennials. Latest data from the Federal Reserve Bank of New York The average American household has about $8,000 in credit card debt.
While personal bankruptcies are often spoken of in hushed tones, corporations often go through debt restructurings and bankruptcies without shame. Former President Donald Trump filed for corporate bankruptcy six times in connection with his casino and hotel businesses. In contrast, the concept of personal bankruptcy was one I only reluctantly considered. But I had heard positive stories from colleagues and friends about how filing bankruptcy had finally freed them from the pressure of not being able to meet their living expenses. It seemed like a much better option than never being able to retire. Still, there were risks. Would I want that on my credit report? Would it be a problem if I wanted to buy a house in the future? (Of course, if I never got out of debt in the first place, I’m unlikely to ever get to that stage.)
I had previously transferred large credit card balances onto new cards with super low interest rates or even zero introductory APRs on a number of occasions, but at this point I had too much debt to continue that strategy.When I was offered a personal loan through Discover Card, I called to inquire but was rejected due to insufficient income and lack of collateral.
Searching for a solution, I contacted a bankruptcy attorney. Although I couldn’t afford to hire an attorney, he gave me the best free advice I’d ever received: my credit card companies might be willing to negotiate and settle my debts. This was a huge revelation for me. With this new information, I was able to research and learn how to approach debt settlement, opening up new avenues for resolving my financial difficulties.
What is Credit Card Debt Negotiation?
The borrower do The credit card industry has a certain amount of power, and it’s only natural that these credit card companies would be desperate to get some money back rather than let their customers default completely, so they will negotiate with customers who are struggling to pay and allow them to collect some of the debt instead of sending it to a debt collection agency.
When it comes to timing, you’ll want to be careful. Certainly, credit card companies will negotiate with you, and you need them to take your financial burden seriously. Depending on the company’s policies, you have a limited amount of time before collections can begin, but generally speaking: The first 30-60 days of a missed payment are usually considered a grace period. Creditors may contact you to remind you that you’re late on a payment and offer options for making the missed payment. Between 60 and 90 days, creditors become more aggressive. They may increase the frequency of their calls and contacts, and start adding late fees and interest.
After 90 days, the debt is considered seriously delinquent. At this point, the creditor may offer settlement options or other ways to pay off the debt to avoid further escalation. I have found that 90 days from the first delinquent payment is the best time to begin the negotiation process. But before that, I make a few phone calls to let them know that I know there is a problem, that I am in a tough financial situation, and that I am trying to fix it.
To maximize your chances of successful debt negotiation, try to start the process well before the 120-day deadline. After 120-180 days, or roughly 4-6 months, of unpaid debt, creditors typically sell the debt as a bad debt to a collection agency, meaning they write it off as an accounting loss. This makes it difficult, if not impossible, to negotiate with the original creditor, and encourages collection agencies to be more aggressive in collecting the debt. You don’t want this outcome, as it can lead to potential litigation, additional legal costs, and a significant drop in your credit score (making it harder to get credit in the future, and of course, more stress).
This process usually involves either settling the debt with a lump sum payment that is less than the full amount owed, or an agreement where the company closes the cards to minimize interest and the customer pays off the outstanding debt. I did both. I settled two credit cards and paid about 40-50% of the debt. I also agreed to payment plans for two other credit cards. I ended up settling the two credit cards with the lowest balances and working out payment plans for the two with the highest balances. It may have been wise to reverse this strategy, but I didn’t have enough cash on hand to do it comfortably. Closing all my cards kept me from getting caught in this vicious cycle. I’ve since budgeted to live exclusively off debit cards, and I’m glad I did.
Why I took the DIY approach
You may have heard of debt consolidation companies, and if you have a lot of debt, you’ve probably been contacted by them. Unfortunately, many of these companies are not reputable, and I didn’t want to risk falling victim to the scams and fraudulent practices employed by some debt consolidation companies. Plus, consolidating your credit card debt allows you to avoid the expensive fees these companies typically charge, which can be up to 25 percent of the debt.
According to Federal Trade Commission and state investigationsFewer than 10% of consumers who use debt consolidation companies successfully complete their programs. Negotiating directly with creditors can help you reach a resolution more quickly than through a third party, where the outcome is often uncertain, and can minimize damage to your credit score.
The first step to paying off your credit card debt is to stop making payments. It seems scary and counterintuitive, but missing a few payments sends a signal to the credit card company that you’re in financial distress. Even if you’re able to make your monthly payments, if you have a lot of credit card debt, that means you’re in financial distress.
Next, you need to prepare by taking stock of your finances. Before you even get on the phone with a lender, create a detailed budget that lists your income, expenses, and total debts, and determine how much you can realistically pay in one lump sum or installments. Before you begin this process, consider setting aside a small emergency fund to avoid future financial problems that will make it harder to get a loan for a while.
Before diving deep into the negotiation process, Fair Debt Collection Practices Actor the FDCPA to make sure your creditor isn’t using illegal tactics, and read about the statute of limitations on your debt. Tax implications of repaying debt— Forgiven debt may be considered taxable income. Consult a tax professional to understand your potential tax liability.
Both credit card companies and debt collection companies can contact you at work, but you should know there are limitations. Under the FDCPA, a company cannot make calls at work if it knows that your employer does not permit it. A company must stop contacting you at work if it tells you that your employer does not permit such calls.
Once you get on the phone, be honest and tell your creditors that you can’t make your payments. Be polite but firm. I’m a former actress and I can tell you I’ve cried a few times. I was exaggerating, of course, but I was really stressed out about my debts.
Start by leaving yourself some room to negotiate and offering less than you can actually pay. Most companies will settle for 30 to 50 percent of the total debt. I was able to settle in the middle to upper part of that range. Be aware that settling a debt for less than the full amount can have a negative impact on your credit score. However, this is temporary and will start to improve after six months to two years. However, a settled account will remain on your credit report for seven years.
At its lowest point in 2019, my credit score was around 475, in the “bad” range. Within a year, my score had risen to “fair.” Two years later, my score had risen 200 points into the “good” range, and by the time I made my last payment in July, my credit score had fully recovered to 715. (Ironically, after I paid it all off, my score dropped 5-50 points. Our credit system is designed to keep us in debt.)
Document everything. If you come to an agreement with the rep, make sure it’s documented before you hang up the phone, including the settlement amount, payment terms, and confirmation that the debt will be marked as “settled” or “paid in full.” This will help minimize the damage to your credit. I always wrote down the name and confirmation number.
Persistence is key. Creditors probably won’t agree to your first offer, so you’ll have to make several calls and negotiate. Don’t get discouraged; it’s part of the process. Stay proactive and follow up regularly if you don’t get a response. Timing your negotiations toward the end of the month or quarter can be to your advantage, as creditors are more likely to agree to a settlement to meet your financial goals.
Five years later, I just finished paying off my last credit card. What a relief. I still have a little student loan debt left, but I can finally start saving for retirement. The road hasn’t been easy, but it’s been worth it. I’ve significantly reduced my total debt and paid off my balance faster than I would have if I had continued making minimum payments.
Looking back on my journey, I wish more people had known about the option of debt negotiation, and I wish I had known about it sooner. Debt negotiation is not a magic bullet, but it can be a lifeline. Do your research, understand your financial situation and your rights, and don’t be afraid to take the first step. It could be the key to taking control of your finances and your life again. myself.
