I was discussing this matter over coffee with a friend today so I thought I would share my input here. Often times when consumers find themselves in credit card trouble it is unitentional and unexpected. Many consumers want to make an effort to pay eventhough the companies will typically make no attempt to help the cusotmer by lowering their rate, stopping late or over the credit line fees, or at least stopping the the barage of phone calls.

Typically people see ads on the tv, in magazines, on the radio, even here on ebay. Sometimes this will be reccomended by an attorney before filling bankruptcy. The thing that is most important that most people dont know is this looks almost as bad on a credit file as a bankruptcy. Some credit analyst I know have even said they would rather see an old bankruptcy than a settlement. In fairness it does show the customer did pay some of the bill. The credit report does not disclose the amount of the settlement. It typically will say "account legally settled for less than the full amount", or something to that effect.

The process of a settllement is typically, but not always, after some lateness. Say a cusotmer misses 3 payments who was usually always current. A company may figure there is real stress and want to recover some of their money before they lose it all. A representative will call, or they will send a letter. Some are creative and include something that looks like a check that says "non-negotiable certificate of participation". They usually start pretty high like 80% of what you owe. Sometimes cusotmers call in to wheel and deal.

What offer you get depends on several factors. If it looks like you are trying to commit theft and not pay the bill, for example charging up 10k in jewerly then wanting to settle, you have be out of luck. IF however you have been a customer a few, always paid on time, and have a good reason like a pay cut, spouse out of work, unexpeced medical expenses you probably get a good deal. I have seen credit card companies settle for less than 30%. Collection agencies take less but if you account goes to a collection agency it really does not make you credit look that much better to settle it.

What the discussion would go is basically you let the company know that you have whatever the problem is. If they are willing to settle they start high like 70%. You plead poverty and come up with something lower than what you can pay ( never make your best offer first) for example if you are prepared to pay 50% offer 33% they may come back with 40%. But dont push too much here and if you say something like "ill just file bankruptcy" the person typically does not care as long as they hit their quota or collection rate. This is another to do toward the end of the month when reps are scambling for quota or within a few days of the billing due date. If they rep tells you they need to get back to you, that is because they will usually need authorization to do the settlment, or they could need authorization just to do as low of an amount as you are looking to do.

There are companies out there who offer to get the settlements for you. They are called debt reduction agencies. These are the ads you will hear and see. There was an attorey in new york Names Andrew Cappoccia who was disbarred due to who this was handled. He was worse than most, but what these companies do is intentionally let the card get so far behind then get offered a settlement. This in turn does damage to your cedit. They also, in my opinion rip you off. Here is an example. Lets say a customer has five credit cards and owes roughly 30k all together. For whatever reason they cant pay and want to settle. The debt reduction agecny negotiates. Lets say they get everyone to take 50% which is 15k. They saved you 15k. They will then want a percentage of the 15k that they save you. if its 33% you will owe them $4,950 for their service. So in reality the debt cost you $19,950 to settle, you get worse credit, and the company charges you for something you can do yourself. It is also important to note that as soon as you are found out to be with one of these companies some credit card issuers will just decide to either sue or arbitrate the account. In most states you can have your wages garnished if they decide to go that route.

Here is the additional surprise. Lets say the above example is true. you think ok its over. The 15k that was settled is now considered taxable income ( God only knows why) and the company is required to send a 1099c. If the government audits you and finds out about this you then owe taxes on the 15k. So now if you are in the 25% tax bracket you owe. You now owe an extra $3,750 ( or whatever your tax bracket is) so the settlemtnt cost you $15,000 to settle, plus another $4950 if you use a company  ( it could be more or less, Capoccia charged 50%) and now $3,750 in taxes that you did not anticipate ( more or less depending on tax bracket). So the total settlement ends up costing $23,700 to settle a 30k debt plus the bad credit you have, but for some it is a good idea. Every now and then a company can be talked out of reporting it as a settlement. This was rare in my day though.

please see my other guides on timeshare sales and be on the look out for guides on debt settlement and collection practices by companies. If you learned anything give me a  helpful, if you have questions feel free to email.

one vote so far unhelpful, guy must for for a credit card company. I know people who charge $75 an hour for the advice I am giving free here.