Credit Card Settlement Options
Credit card settlement allows you to pay off your cards for less than the full balance. The process is called debt settlement and could result in significant savings. However, there are disadvantages. Your credit report will be updated to reflect that the account was "settled for less than the full balance"--a negative entry that could remain on your report for seven years. Also, any savings you realize could be treated as taxable income by the IRS.
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Lump Sum Settlements
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Credit card companies generally will entertain settlement offers after you fall three or four months behind. At six months accounts are often closed and and sold to debt collection agencies. Before that, card companies will often seek to settle with the card holder. Lump sum settlements require a one-time payment to pay off the account. Settlement terms vary depending on the card company, but could be as low as 20 percent of the balance, according to a New York Times report in 2009. However, settlement offers for around half the balance are more common.
Installment Settlements
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You can also settle a delinquent credit card account by paying in installments, if the card company agrees. Instead of paying a lump-sum settlement, you may be allowed to pay off the account in, for instance, three equal payments over 90 days. Other installment arrangements may also be available.
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Debt Settlement Firms
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For-profit debt settlement firms will contact card companies on your behalf to ask for settlements. However, the Federal Trade Commission (FTC) says you should avoid these firms because many of them cannot be trusted. USA Today newspaper reported in June 2010 that one major card company has a policy against working with any for-profit debt settlement company. The FTC agrees that consumers are better off working directly with their lenders.
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References
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