Settling credit card debt is an alternative that you may be able to take if you have long outstanding credit card debts where you are not making the monthly payments.

What Is Cut-rate Debt Settlement?

Every now and then, if a company can from its records see you have not paid anything for a while and they figure it is unlikely that they will get the total amount of the debt plus interest from you, they will send you a discounted debt settlement offer.

This means that they’ll write with an offer where you’ll be able to pay perhaps 50% for this debt and they’ll write off the rest. Usually they’ll want this all in one payment, but if it is a large amount they might accept it in two or three instalments. Frequently the letter will come from a debt collection agency. This could mean your original lender has signed over the debt to debt collectors, or it might simply mean that the agency is working to get a percentage of whatever they can recover.

Why Do They Offer Debt Settlement?

The finance companies offer this if they can see that you’re having a great deal of trouble making payments, they might have to take you to court to get the whole amount, and perhaps they wouldn’t even get it then, because you might declare bankruptcy.

So they have got a choice between incurring the price of court proceedings and maybe still getting nothing from you, or offering you this deal where you pay 50% or whatever. They figure they are going to be better off accepting half of what you owe, than attempting to get the total amount with the courts.

What Should You Do?

Whether you need to accept the offer relies on many factors.

First, you have to be aware that accepting this will likely affect your credit score in a negative way, because you won’t have paid off your whole debt. If you are able to pay the total amount then it is better on your credit record if you do so. However, you probably would not have gotten to the point of receiving a settlement offer if you can pay in full. Accepting the settlement offer is normally better than having court actions against you.

Second, you will need to consider how you can make the payment that they want. Does it mean that other debts will go unpaid for a couple of months? What is going to be the implications of that? Would you now miss rent payments and maybe lose your home? Think carefully about ways to raise the money.

Third, even if you decide to accept it could be worth trying to negotiate a lower settlement. This means calling them and saying that you can’t pay what they’ve asked for but you can pay 40% or whatever. This is often worth trying because it can save you some money without extra penalties.

When you call, write down the person’s name that you speak to. If they accept your offer, ask them to put it in writing and watch for the letter to come before you pay. Then write a letter to send with your check stating that this is now full and final settlement of the debt, and ask them to write back acknowledging that the debt is paid.

Remember that if you decide not to accept the offer, then after some time they might take the matter to court. A court may judge that you need to pay the whole amount plus the costs, so you would have a lot more to pay.

If you decide to accept, always read the small print on any offer. You have to make sure this is now full settlement and they’ll write off any additional debt, so they’ve got no right to come back to you in future demanding more.

When everything is complete, take a look at what is posted to your credit record. If there is any mistake you should ask for it to be corrected right away and you will need to send copies of your entire correspondence. So keep all paperwork if you accept any method of credit card debt settlement.