Successful credit card negotiations follow certain rules and unfold over time. Knowing what to expect will help you plan your strategy and maximize your chance of achieving your debt settlement goal. In this article, you’ll learn about tried-and-true negotiation techniques, the tax ramifications of credit card settlement, and why you might want to file for bankruptcy instead.
How to Get the Best Settlement on a Credit Card Debt
Generally, the longer you wait, the more favorable settlement offers you’ll receive. A debt buyer who purchases your debt after two years will offer a better deal than the original creditor when you’re only 60 days behind. (We explain the different parties below in "Who Will Contact You When Collecting Credit Card Debt?")
The drawback to waiting, though, is continual damage to your credit. Also, consider your peace of mind—do you want to deal with years of phone calls, letters, and collection activities by different companies as your debt gets transferred and sold?
Choosing Your Settlement Number
Before contacting the creditor, determine how much you will pay to settle your debt. You’ll want to choose the highest amount you can tolerate to feel comfortable walking away from the negotiation if it doesn’t go as planned.
If you skip this step, you’ll risk getting caught up in the process and paying more than you might intend to pay. For instance, if you owe $10,000 and know you don’t want to spend more than $6,000 to settle the debt, $6,000 will be your highest settlement number.
Negotiating the Debt: Starting Low
People who regularly negotiate assume you’ll start with a low number and gradually increase your offer—not start with the highest number you can tolerate. So, don’t expect your opponent to be satisfied settling for your initial number.
You’ll want to start by offering a lower settlement amount than you’re willing to pay. For instance, suppose you owe $10,000, and your settlement tolerance (the most you’ll pay) is $6,000. But you don’t want to pay more than you must and hope the creditor will settle for $3,000. To give yourself the negotiating room needed to work up to $3,000, you’d probably want to start low by offering $1,000.
Refusing to Bid Against Yourself
“Bidding against yourself” happens when you raise your offer without waiting for the other side to respond with a counteroffer (their suggested settlement number). Your opponent might try to badger you into bidding against yourself by saying something like this: “Three thousand dollars is unreasonable. You’re going to have to come up with more money. Give me another number.”
The best approach is to decline the request and ask the other side to counter instead. Asking someone to bid against their offer is one of the easiest ways to measure another person’s negotiating skills and to raise the opening bid without making a counteroffer. Although you can count on it happening, you won’t want to fall for this trick.
“Respecting the Process” So You Don’t "Leave Money on the Table"
Don’t be surprised if you have to call your creditor multiple times before reaching an agreement. You and the creditor will be more inclined to settle after exchanging multiple offers and exploring whether there’s an opportunity for a better deal.
As often said in the negotiation world, a good negotiation requires you to be patient and “respect the process” so that you don’t "leave money on the table” (settle for an inferior deal).
Calling at the End of the Month With a Lump-Sum Offer
Debt collection agencies typically expect employees to meet monthly quotas, so your chance of a lower settlement increases toward the end of the month. Also, a collector will be more interested if you offer to pay the entire settlement amount in one lump-sum payment. Collection agencies prefer getting money now rather than agreeing to a payment plan over time.
Get the Settlement Terms in Writing
Once you reach an agreement, you’ll want to get the terms of your settlement in writing before paying the settlement amount. The letter should state the amount the creditor will accept in satisfaction of your obligation and the date you must pay the funds. If you skip this step, you’ll have difficulty proving the agreement's existence.
Who Will Contact You When Collecting Credit Card Debt?
If you fail to pay a credit card debt, you might get bombarded with calls and letters from companies that don’t seem to have anything to do with the credit card you used. As time goes by, you might be contacted by different companies telling you they’re collecting the debt, servicing the debt, or the owner of the debt. Any of these people could include original creditors, debt collection agencies, debt buyers, and lawyers.
Because understanding the role of these different parties and the life cycle of your credit card debt can help you negotiate a payment plan or settle the debt, we list the various companies and agents you might encounter when you default on your credit card debt.
The Original Creditor
The original creditor is the credit card company, like Visa or Discover, with which you incurred the debt. Retailers can also be original creditors when they extend credit. For example, large retailers, like Target, qualify consumers for credit, have their own credit departments, and issue retail credit cards.
If you fail to pay a credit card debt, the original creditor will usually try to collect from you for about 30 to 90 days. However, original creditors are generally not equipped to conduct prolonged collections on long-overdue debts. And many want to avoid the negative customer relations that collecting debt might have. So, after 30 to 90 days, original creditors often send defaulted credit card debt to a collection agency.
Collection Agencies
Original creditors hire collection agencies to collect debts. The original creditor might pay the collection agency a percentage of the money it recovers or a flat fee. The collection agency will often refer to the original creditor as its “client” because the original creditor still owns the loan.
The original creditor will typically contract with the agency for a set time before the debt is reassigned. If the first collection agency fails to collect the money owed, the original creditor will send the debt to a new collection agency. The new collection agency will have another set amount of time to collect your debt, and if they’re unsuccessful, the debt might be reassigned to a new collection agency, and so on.
A collection agency won’t file a lawsuit in its own name. If a lawsuit is filed, the suit will typically be filed in the original creditor's name. So, you might have multiple collection agencies contacting you, but when you are sued, the original creditor’s name is on the lawsuit.
Learn more about what to expect when your debt goes to collections.
Debt Buyers
At any time, even after a debt is years in default, the original creditor might sell your debt to a debt buyer. Debt buyers often purchase debt for pennies on the dollar from the original creditor, buying thousands of accounts at once. Unlike the collection agency, which was working for the original creditor but didn't actually own the loan, the debt buyer does own the loan.
Because the debt buyer has purchased the debt at such a favorable price, it often can offer the best settlement. However, debt buyers sometimes file lawsuits to collect their debts. Because they own the loan, they can sue in their own name but often have problems demonstrating loan ownership or providing other evidence needed to obtain a judgment against a debtor.
When Lawyers Get Involved
A lawyer might get involved at any time in the collections process. The original creditor can retain an attorney, or the debt buyer can do so if it has purchased the debt. Often, though, a lawyer isn’t retained until the debt is very overdue.
If you get a letter from a lawyer, that doesn’t necessarily mean that you’re being sued. Many collection law firms are, in fact, collection agencies in disguise, with large collection departments. The lawyers might not ever have any direct involvement with your debt. Unfortunately, unless you talk to an experienced debt collection attorney, it might be difficult to figure out whether a law firm is merely a collection agency in disguise with no intention of filing a lawsuit or whether the firm will likely file a lawsuit against you.
Lawsuits for Credit Card Debt
Not all overdue credit card debts result in lawsuits. And when they do, frequently, the lawsuit is not filed within the statute of limitations. A "statute of limitations" is the time limit set by law, which varies from state to state, that a creditor or debt buyer must bring a lawsuit to collect on a defaulted debt.
Even after a lawsuit is filed, it’s not too late to work out a settlement. Although, by this point, any settlement amount will probably have attorneys’ fees added to it. You should be very aware of court deadlines, even if you’re trying to negotiate a settlement.
When Bankruptcy Is a Better Option
If you owe enough credit card debt, bankruptcy can have a distinct advantage over negotiating down your debt. Why? Because you won’t pay taxes on credit card debt that’s wiped out in bankruptcy. Remember that once you negotiate down a debt and the taxes are assessed, you’ll likely be stuck with them. You’ll want to file for bankruptcy before you strike up a deal.
If you want to learn whether filing for bankruptcy is appropriate, talk to a bankruptcy lawyer. A bankruptcy attorney can assess your financial situation and determine whether you’d benefit from a Chapter 7 bankruptcy, a Chapter 13 bankruptcy, or debt negotiation.
Find Negotiating Help
To learn how to get free help dealing with your debts, like from a legal aid program, see How to Get Free Help Negotiating With Your Creditors. If you don’t qualify for a legal aid program or you’d rather an attorney negotiate with your creditors on your behalf, consider hiring a debt settlement lawyer. To get information about how to find a lawyer to help you deal with your debts, see How to Find a Debt Relief Lawyer.