Every year, hundreds of thousands of Americans run into trouble with their credit card accounts. In some cases, folks lose their jobs, and have trouble making minimum payments. In other instances, an illness, or perhaps a divorce, puts them in a tough financial position.
They fail to make payments, and after 6 months, the account is charged off. This means that the credit card issuer is treating the account as a loss (for tax purposes), and the account is closed.
Perhaps some of this sounds familiar? Maybe you’re dealing with some charged off credit cards? You want to settle these accounts, but aren’t sure where to start.
Below, we’ve laid out a few strategies you can follow, to most effectively settle these debts. Keep in mind that these aren’t “one size fits all” strategies. Things operate a bit differently with each debt buyer (more on that later) or creditor. However, in general, the strategies below can be quite effective.
A Note About Debt Buyers & Original Creditors
Before we dive in, it’s important to understand the difference between debt collection agencies, debt buyers and original creditors. An original creditor is a company like Chase or Capital One or American Express. These companies issue credit cards, for use by consumers.
When a debt is charged off by an original creditor, the original creditor has a few options. They might try to collect on the debt internally, using their own staff.
If the debt is large enough (perhaps over $1,000, though usually more), the original creditor might sue in state court. Original creditors often sue, and can be quite aggressive in collecting the money owed.
When an original creditor collects on a debt, they aren’t bound by federal debt collection laws, which regulates how you can be contacted regarding a debt, what a debt collector can say, and so on. In some cases (but not most), original creditors are regulated by state debt collection laws.
In other cases, an original creditor might hire a debt collection agency, or sell the debt to a debt buyer. In both cases, the original creditor is no longer actively collecting on the debt – rather, a third party (the debt buyer or debt collector) is now doing so.
A debt buyer or collector might use a variety of tactics to succesfully collect on a debt. In many instances, they’ll write to you or call you, seeking payment of the debt. In other instances, they might sue you in state court (this is much more common with debt buyers than with collection agencies).
There is one important difference between debt buyers and debt collectors. Debt buyers typically purchase the debts they’re seeking payment on, from the original creditor. Often, these debts are bought for just pennies on the dollar.
In most instances, the credit card agreement you signed allows for the debt to be sold to a debt buyer. A debt buyer can report the debt to credit bureaus, engage in collections efforts, and (assuming all legal requirements are met) sue you in state court.
Debt buyers are quite aggressive in taking folks to court. Debt collectors are far less likely to do so.
Now that you understand the difference between the three types of parties which might be collecting on your debt, let’s take a look at some negotiating tactics. Keep in mind that what we’re discussing below is not “one size fits all.” Every situation is a bit different.
1. Offer 35% Of The Amount Owed – & Work Your Way Up If Needed
When negotiating on a debt, it’s wise to start relatively low. We suggest offering no more than 35% of the amount owed on a debt. This means that if you owe $1,000 on a charged off credit card, you offer $350.
Most times, this initial offer won’t be accepted. Instead, the creditor or debt buyer will propose a counteroffer, perhaps anywhere from 50% to 70% of the amount owed.
You don’t want to accept the first counteroffer they throw out. Instead, you should propose a number that is somewhere between what they’re asking for, and what you initially proposed. So, let’s say that you offered $350, and they come back with $550.
You might want to offer $450 – or perhaps even just $400. Remember that debt buyers and creditors want your money. That is how they stay in business. If you stay firm, you might be able to get a better offer than you otherwise expected.
To a large extent, debt negotiation is a game of tug of war. The longer that you can stay in, the better your chances of winning.
At the same time, it is important that you be realistic. If your goal is to settle a debt, you should be open to reasonable offers.
Keep in mind that negotiating with debt buyers is somewhat easier than conversations with original creditors. Debt buyers buy debts for just a fraction of what they’re worth. This means that they are more willing to accept a lower offer, as compared to an original creditor.
2. Offer To Pay In One Lump Sum, Rather Than In Installments
When you settle a debt, you have a few options for payment. You might pay the entire settlement amount in one sitting (known as a lump sum payment). Or, you might break up what you owe into several separate installments, and pay what you owe over time.
If you want to save money, you should consider the lump-sum approach. In the view of most credit card issuers, there is less risk if you pay them what you owe in one sitting, rather than over time. Therefore, if you’re willing to pay all at once, they’ll typically offer you a smaller settlement amount.
Also, the sooner you’re prepared to pay, the better off you are. If you call up the credit card issuer, and offer to pay the settlement amount immediately, in one sitting, you’ll typically get a better deal, than if you pay in several installments.
3. Be Persistent
Settling credit card debts is a negotiation. This means you’ll probably need to have multiple phone conversations, and perhaps write a few letters. Things are not likely to get resolved on the first try.
When you first make contact with a creditor or debt collector, you should make the lowest offer possible. They’re not likely to accept this initial offer.
That isn’t a reason to get frustrated. Instead, you should return again, in a week or so, and see what they say. If that does not work, you might want to consider raising your offer amount – but not offer the full amount sought by the creditor or debt buyer / collector.
After some back and forth, you should be able to reach a resolution. Keep in mind that if you want your debt issue resolved more quickly, you’ll probably need to spend less time negotiating – and thus accept the creditor or debt buyer’s offer more easily.
The Final Word
Unpaid credit card debts carry serious consequences. From lawsuits to credit score damage, there is a range of headaches you have to deal with.
For these reasons, settling these debts makes sense. However, you want to do so in the smartest way possible, so that you accomplish your goal, while saving money. Following the strategies discussed above, is a wise path forward.
