Credit Card Debt Relief
- Credit card debt relief allows you to pay off your credit cards for less than the amount owed.
- You may be able to get credit card debt relief from your card issuer, a debt buyer, or a collection agency.
- You can negotiate yourself or hire a debt relief company.
Feel overwhelmed by credit card debt? Consider pursuing credit card debt relief, which means paying less than you owe to have your balance zeroed out. There are several routes to obtain credit card debt relief if your debt becomes unfavorable. Just be aware that credit card debt relief is not a free lunch and has consequences.
Learn more about credit card debt relief, credit counseling and bankruptcy options, applicable interest rates, and how your credit score is affected by reading on.
How to Get Credit Card Debt Relief
The right credit card debt relief solution for you depends on your credit card debt, how many payments you have missed, and who owns your debt.
The first step is to get organized if you have debts you can’t pay. Take some time to figure out the following:
Whom do you owe? If you're having trouble paying off debt, chances are you owe money to more than one creditor. You may have different credit card companies, lenders, or merchants after you. To complicate matters more, these creditors may have passed the job of collecting your debt along to a collection agency or a debt buyer. The next section of this article will explain the differences in dealing with the different types of debt collectors. For starters, though, make a list of every organization that's after you for money.
Do you dispute these bills? Separate the money you agree you owe with amounts you dispute. That could be due to a mistake, overcharging, or nonperformance of service. Gather documentation to prove your point.
How much do you owe? List this out for each organization trying to collect money from you, and then total them all up.
What is the minimum amount of monthly payment being sought? Add up the minimum payments on credit cards and monthly installment debt payments that are due to see how much you'd have to come up with each month to keep up with your debt. Note that if some charges are long overdue, some of your creditors may be seeking a large lump sum upfront to cover missed payments, interest, and penalties.
Determine what you can afford to pay. Go over your budget and cut out anything that isn’t necessary. Figure out how much you could pay each month toward your debt.
The key here is the gap between the amount you’re being asked to pay now and what you can afford. Now that you’re organized, you’re prepared to start working on closing that gap.
Seeking Debt Relief Depends on Whom You’re Dealing With
Debt collectors know they can't get something when you've got nothing. Their goal is to get as much out of you as possible, even if it's less than the total amount you owe. They'd rather get partial payment than nothing at all.
That’s why there’s room to negotiate. However, debt collectors are tough adversaries. They’ve heard every excuse in the book and know how to drive a hard bargain.
How you approach this negotiation depends on the type of organization pushing you. It might be:
The original creditor
A collection agency
A debt buyer
Each type of debt collector works differently and is motivated uniquely. That should help guide how you deal with them.
The sections below will explain more about these different types of debt collectors.
Credit card debt relief from your credit card company
Credit card companies have departments that specialize in collecting late payments from customers. Expect to start hearing from them very soon after payment is overdue.
Unlike some collection agencies pursuing credit card debt on behalf of other companies, when a company is attempting to collect its own debt, it isn't bound by a law called the Fair Debt Collection Practices Act (FDCPA). That law restricts how a debt collector can approach a consumer, but those restrictions do not apply to a credit card company trying to collect its own debt.
However, while a credit card company may not have to abide by the FDCPA, they are motivated to work with you to find a reasonable solution.
First of all, they haven't yet had to go to the expense of hiring a debt collection agency. If you can save them that expense with a compromise, original creditors may be willing to work with you.
Second, these companies aren’t primarily in the business of collecting past credit card debts – they’re in the business of maintaining ongoing relationships with customers. If there’s a way they can handle your credit card debt that gets you back to being a profitable customer for them, they’re likely to be open to it.
Your best approach, in this case, is to keep those motivations in mind. If your pitch is to extend repayment, the credit card company might be willing to work with you. This gets them paid eventually and retains you as a customer.
Suppose you can demonstrate to the credit card company that you have absolutely no way of paying the full amount you owe. In that case, it might negotiate a settlement for a lesser amount. From the creditor's point of view, settling for a little less upfront might be better than dragging out the process for months or years. It can avoid the expense of hiring a collection agency and the risk of getting far less if you go into bankruptcy.
You are more likely to make a case for settlement if you demonstrate genuine financial hardship. If you've been splurging on vacations or luxury items in recent months, expect the credit card company to be suspicious of how genuine your difficulty is.
Negotiating credit card debt relief with a collection agency
If payments are overdue by six months or more, the credit card company may have assigned your case to a collection agency. These companies specialize in collecting delinquent debts, usually on behalf of the original creditor.
Collection agencies get paid according to how much money they get from you, so expect them to use hardball tactics. This is where consumer protection law – the FDCPA – comes into play.
The FDCPA applies to debt collectors that are working on behalf of other companies and protects consumers in the following ways:
It requires that the debt collector provide written validation of the credit card debt. This includes the amount of the credit card debt and details of who is owed.
Once that written validation is provided, the consumer has thirty days to dispute any or all debts listed. Any such dispute should be made in writing.
If a written dispute is received from the consumer, the debt collector has to provide written proof of the credit card debt or a copy of any court judgment affirming the obligation. All debt collection activities must cease until this documentation is provided.
Debt collectors cannot contact a consumer outside of the hours of 8 a.m. and 9 p.m. in the customer’s time zone.
Employers have the right to prohibit debt collectors from making collection calls at work or contacting their employees at their place of business.
Debt collectors can only communicate about the credit card debt with the consumer, the consumer’s representative, the creditor and their representatives, and consumer reporting agencies where permitted by law.
Debt collectors may not use abusive or threatening language with a consumer.
Knowing these rights can help you establish ground rules that allow you to deal with the collection agency in an orderly manner.
Because the collection agency gets paid according to how much of the credit card debt they collect, your communication should focus on proving to them the limits of what you’re able to pay. Once they know there’s no more money to tap into, they’d rather collect a partial amount and get paid than continue pursuing you without getting paid.
However, don't make any partial payments until a complete settlement has been agreed to in writing.
Negotiating credit card debt relief with a debt buyer
If a credit card debt is long overdue and efforts at collecting it have failed, a credit card company may cut its losses and sell it to a debt buyer.
Because there is a slight chance of collecting on this kind of bad credit card debt, that debt is often sold for a greatly reduced amount. That does not affect the amount you owe, except that you would now owe the money to the debt buyer.
Once the debt buyer owns your credit card debt, they would now be considered an original creditor instead of a collection agency working on behalf of a creditor. This means that debt buyers are often not restricted by the FDCPA unless their primary business is debt collection rather than investing in bad credit card debts.
When dealing with debt buyers, the key thing to remember is that they may have purchased your credit card debt for just pennies on the dollar. If you pay them any more than that, they've made a profit. That leaves room to negotiate.
However, as with all debt collectors, debt buyers are hard-nosed operators who've seen it all before. They will not reduce the amount you owe them until they are convinced you have nothing else to give.
“Government program” credit card debt relief
If you’re wondering about so-called government programs for credit card debt relief, the truth is there is no such thing.
There are consumer protection laws like the FDCPA. However, if someone approaches you offering to enroll you in a government credit card relief program, it’s almost certainly a scam.
Statutes of Limitations for Credit Card Debt
Does credit card debt ever get relieved or forgiven if you wait long enough?
Each state has a statute of limitations that governs how much time someone has to sue you, including for a bad credit card debt.
These statutes vary from state to state and are typically three to six years.
So, if you refuse to pay, in theory, you could try to run out the clock by waiting for the statute of limitations to expire. However, debt collectors know the game better than you. They are well aware of the debt's origination and how much time they have to sue.
In particular, don't try to use the statute of limitations as a negotiating tactic by threatening to hold out until it expires unless the debt collector gives you the deal you want. Using that deadline as a threat could prompt the debt collector to initiate legal action to beat the time limit.
How Debt Relief Companies Work
All of the above can be a little confusing, especially if you have multiple debt collectors after you.
This is where adebt relief company can help. A debt relief company can help you organize your debts and figure out what you can afford to pay. Then, it can use its experience and knowledge to negotiate with your debt collectors and strike a deal on your behalf.
In exchange for this, debt relief companies charge you based on a percentage of your credit card debt. So, any debt reduction they negotiate will be offset to some degree by what you have to pay for this service.
Getting Credit Counseling Help
Alternatively, you could pursue a debt management plan (DMP) from a nonprofit credit counseling agency. This consolidates several credit card obligations into one payment, thereby reducing your interest rates and setting up, on average, a three- to five-year payback schedule. A DMP could be a worthy solution if you encounter challenges repaying your credit card bills monthly. It can affect your credit score less than bankruptcy or debt relief because you completely repay your original debt.
On the other hand, credit counseling involves asking for help from a third party, like a nonprofit credit counseling agency.Their professionals are typically certified and experienced in consumer credit, financial and debt counseling, and budgeting. A counselor consults with you, reviews your finances, and helps develop a particular strategy to ameliorate your debt problem.
The credit counseling expert provides recommendations on money management, assists in developing a budget, offers financial educational opportunities, and aids you in getting a copy of your credit scores and credit reports.
The Price of Credit Card Debt Relief
Whether you negotiate credit card debt relief by yourself or through a debt relief company, there are still costs involved.
All while the process continues, your late payments will show up on your credit report and damage your credit score. Then, once a settlement is reached, that settlement will likely remain a bad mark on your credit history for seven years.
In addition, forgiven amounts are likely to be considered taxable unless you prove that you're insolvent.
If you can't reach an agreement with your creditors and don't have the resources to pay, bankruptcy is an option.
Bankruptcy is a legal process by which a court considers all your credit card debts and resources and decides how much you can afford to pay each creditor. This settles those credit card debts once and for all.
However, this means giving the court control over how much of your income and property you'll have to put towards your credit card debt -- and that's likely to be a substantial amount. You may also be paying upfront legal and filing fees in the process.
On top of that, the US Consumer Financial Protection Bureau advises that bankruptcy will stay on your credit report for ten years. This severely restricts your ability to get credit and makes credit more expensive when you can get it.
Taxes on Credit Card Debt Relief
One difference between bankruptcy and other forms of credit card debt relief is tax treatment.
Internal Revenue Service rules hold that debt canceled in a bankruptcy proceeding or other legal determination of insolvency is not taxable. By filing bankruptcy, you're essentially proving that you're insolvent.
In contrast, if a creditor relieves your credit card debt, the amount forgiven is treated as ordinary income for tax purposes. To avoid taxation on forgiven amounts, you'll have to prove that you're insolvent.
According to the IRS, "A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven credit card debt may be excluded as income under the 'insolvency' exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent."
You can be considered insolvent if your credit card debts exceed the value of everything you own.
How Can Credit Card Debt Relief Work for You?
If debt collectors are hounding you, you do have options. You can try to negotiate a settlement yourself, have a debt relief company work on your behalf, or as a last resort, declare bankruptcy.
Rather than scrambling to respond to each collection attempt individually, get organized and have a strategy. The more you can control the process, even if it means paying for professional credit card debt relief help, the better the outcome is likely to be.
Does credit card debt go away when you die?
After you pass away, any credit card debt that remains unpaid must be repaid by your surviving spouse or heirs before any assets from your estate can be distributed to them.
How long does it take to rebuild credit following debt settlement?
The length of time before your credit will begin to improve after debt settlement may greatly depend on your credit history and your record of paying off debts on time or not.
If you have previously enjoyed a good credit history, your credit score may start to tick up within a few months following debt settlement. But if your credit history is poor, the time involved may be longer – perhaps one to two years or more.
How much credit card debt is normal?
As a rule of thumb, your credit card debt should not exceed 10% of your take-home pay (net earnings). Credit card debt is often considered problematic and excessive if your total balance exceeds 30% of your total credit limit.
What is the fastest way to pay off credit card debt?
Two popular and speedy debt repayment approaches are debt snowball and debt avalanche.
With debt snowball, you prioritize your credit card repayment based on the smallest to highest debt balance owed. You contribute as much as you can every month on that balance, paying off the smallest initially, then targeting the next smallest, then the next smallest, etcetera.
With debt avalanche, you attempt to repay your debts with the highest interest rates first, as these are the most costly. Although it may take longer to pay off your initial debt, the debt avalanche method will eventually dig you out of debt faster and save the most money on interest payments.