What You Should Know about Credit Card Debt Negotiation

If you’ve been overwhelmed by credit card debt, negotiation might sound like a great idea. But if you do decide to negotiate, prepare yourself for a long and bumpy road. You’ll probably have to make numerous phone calls to your credit card company, talk to endless managers, and agree to terms that are less than ideal. (Nobody ever said debt settlement was easy!) Before you begin, there are some things you should know.

Your credit score could plummet even more. When you first contact the credit card company to settle your debt, it’s likely that they’ll freeze your credit limit right away. If your cards are maxed out, that won’t matter so much. But if you’re well below your maximum credit limit, your credit score could fall as a result of the lower limit.

You might have to pay taxes. If you manage to negotiate a lower sum for your debt repayment, you might end up owing taxes on the portion of the debt that was forgiven. Whenever a lender forgives $600 or more of the principal, they file a 1099-C form with the IRS. This means that if you arrange a nice lump-sum payment at a discount, you’ll have to pay taxes on the difference. Note that this only applies to the principal, not to fees or interest rates that get waived.

Bad reports mean bad credit. Do you know how your bank will report your repayment efforts to the credit bureaus? Find this out before you agree to any arrangement. A partial debt settlement can be just as bad for your credit score as a total default. Also, if the bank reports partial payments, your credit score will suffer. As part of your deal, ensure that the bank will report your payments as on-time and in full. This is the stickiest issue surrounding debt negotiation, since you have very little influence over how the lender will handle the reporting.

What can you do if you need to negotiate your credit card debt? Experts recommend being honest about your financial situation and your desire to pay. Ask to have some of the debt forgiven, or ask for a lower interest rate so that more of your monthly payments go toward the principal. If you’re considering bankruptcy, let the creditor know; that might be the little shove they need to start working with you.

Most importantly, don’t make payments until you’ve got a written copy of the agreement. That way, you’ll have the terms clearly spelled out, and you’ll be able to produce the document in court if necessary.

5 Tips for Dealing with Credit Card Debt Collectors

If you’re out of a job and behind on your credit card payments, it might be very tempting to stop taking calls from your credit card issuer and their collection agency. But that’s not the best way to handle things. Even if you don’t have a penny to give them, it’s a bad idea to ignore the problem and hope that it will go away. Here are five tips to remember when you pick up the phone and get in touch with your credit card issuer.

Tip 1: They Don’t Know What You Don’t Tell Them

As unlikely as it may seem, banks do want to work with their customers. Many have instituted special programs for customers who are behind on their credit card debt and facing tough financial times. Call your credit card company – preferably before you default, but definitely if you can’t make payments – and see what they can so for you. If you simply stop paying, they won’t know that you’re facing special circumstances.

Tip 2: Tell It Like It Is

Tell the collector that you’re unemployed and cannot afford to make payments at this time. That’s really all they need to know. If they push you to set up a payment plan, cut in and tell them you’ll call back when your situation improves.

Tip 3: Keep Written Records

Make a note of the date and time when you called. Also take down the first and last name of the person you spoke to, and a summary of what was said during the call. If any collector harasses you or does not adhere to the rules for debt collection, keep records that you can refer to if you decide to go to court.

Tip 4: Plan for the Future

Right now, getting an income is more important than setting up a payment plan with a creditor. Of course, late payments and closed accounts will hurt your credit score, but sometimes you have to make hard choices. Focus your energy on finding a new job rather than fighting with debt collectors.

Tip 5: Pay What You Can Afford

When you’re back on firm financial footing, call the collection agency and make an attempt to settle the debt. Some will settle for pennies on the dollar. Others will resist your efforts to negotiate a lower pay-off. Offer them a lump sum or monthly payment amount that you can reasonably live with. If they refuse, get a qualified credit counselor to deal with them.