You Have the Right to Settle Your Credit Card Debt?

  • By:Hoosier Bankruptcy

Have you heard the commercial which tells you that you have the right to settle your credit card debt for a small percentage of what is owed?

Can that be true? Certainly, you have the right to settle the debt, but the creditors likewise have the right to demand full payment. It is a game of words.

First: Send a letter to the creditor asking them for verification of the debt. A simple letter will reference the debt, original creditor and state that you are “disputing the validity of the debt”. You will want to ask for copies of the credit application, all monthly billing statements and other relevant documents. You can find a sample letter on the consumer reports website:

Second: Once you have evidence of the debt you need to determine if the creditor still has the legal right to collect the debt. Each state has a statute of limitations. Indiana’s statute of limitations for collection of a debt is six (6) years. (I.C. 34-11-2-7) If the debt is older than six (6) years and you have not made a payment within that time the debt may be uncollectable! If you make a payment or agree to make a payment (of any amount) it can revive the debt and cause it to again be collectable. This is sometimes called Zombie Debt! You can find proof of the dates within the debt verification information that you request.

Third: If you find that the debt is in fact valid and collectible and you are dealing with a debt collection agency keep in mind that they most likely have purchased that debt from your original creditor at a deep discount; they likely paid pennies on the dollar! Because of this most debt collectors will take substantially less than you owe if you are a savvy negotiator.

Try to negotiate your settlement toward the end of the month when the representatives are working on their quotas. Start at 25% and work from there.

Also, keep in mind other points as you negotiate:

  • Your best deal is going to be a lump sum payment; if you require time to pay you likely won’t be able to negotiate as deep of a discount.
  • As part of your deal you should demand that they report the account as “Paid as Agreed” – if they report it as “Settled” it will have a negative impact on your credit score.
  • You should also ask that they erase the trade lines associated with the debt. Trade lines are just the account and its history on your credit report. Trade lines can take up to seven years to drop off your report, so getting rid of negative ones early is beneficial. Your creditor may or may not agree to do so, but it’s worth it to ask, especially if you’re planning on paying a lump sum.
  • Ask them to provide you with a date by which your credit report will be updated.
  • Make sure you have proof of your payment and that the payment references the settlement. (you may have to use this to enforce the terms at a later date)

Fourth: If you are successful in negotiating a settlement of your debt MAKE CERTAIN TO GET THE AGREEMENT IN WRITING BEFORE MAKING A PAYMENT. After you make payment and have resolved the debt CHECK YOUR CREDIT REPORTS! You may ultimately have to provide a copy of your settlement letter and proof of payment to the Credit Reporting Agencies to have your scores updated

Fifth: Be aware that you may have to pay taxes on the amount that your creditor(s) cancels. Be certain to watch for IRS Form 1099-C in the January following your settlement. There are methods to avoid paying tax on this debt that can be discussed with your tax professional. See in particular IRS Form 982.

Often times, despite best efforts, it simply is not possible to settle the debt. Bankruptcy may be the only feasible method for disposing of the debt. If you believe that you are in need of bankruptcy assistance or want to discuss the possibility of filing feel free to contact our office. 765-287-1717.


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