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The Truth About Settling Credit Card Debt

The idea of a forbearance or a modification on a mortgage has become extremely common.  The next financial bubble expected to burst is the credit card market.  There are now 1.2 billion credit cards in America today. The total credit card debt owed by Americans is nearly 1 trillion dollars.  Today, I will address five major myths about settling credit card debt. 

Myth # 1 – It Is Easy To Settle Your Credit Card Debt For Less Than You Owe

I wish it were true, but easy settlements of credit card debt for pennies on the dollar are extremely unlikely.  In order to even have a chance at a reduced settlement with your credit card company, you must be able to demonstrate that you have a significant financial hardship.  You don’t hear credit card companies talking about settlements, since they know if they did they will be inundated with requests.  If you truly can demonstrate that you are unable to make your credit card payments you have a chance of a reduced settlement being accepted.  This would normally result in a lowering of the interest rate, a lower monthly payment, and even a forgiveness of a portion of your overall debt (if you make the payments as agreed).  In order to convince a creditor that you are truly a hardship case, you must pursuade them that you do not have the income to make the payment and that you do not own any substantial assets.  Don’t expect much cooperation if you have considerable equity in your home or other assets such as newer vehicles, etc… 

(I want to make it clear that I am addressing in this section the matter of current credit card accounts and not older collection items.  Settling an older account with a collection agency can many times be achieved with significant discounts of 50 percent or more.)

Myth # 2 – You Need a Debt Settlement Company In Order To Settle Your Credit Card Debt

While it may be a bit intimidating, you can pick up the phone and contact a credit card company and work out your own settlement.  Some debt settlement firms charge the client (you) and others get their fee from the creditor.  The fee can be 15 percent or more of the total debt involved. By handling the matter yourself (and cutting out the middle man) the net amount of money going toward paying off your debt will be greater.  Additionally, many settlement firms will also charge you several hundred dollars per year for accounting fees.  

Myth # 3 –  All Debt Settlement Firms Are About The Same

What is truly heartbreaking is to hear of someone losing hundreds or thousands of dollars to a disreputable debt settlement company (this happens more often than you would think).  Since most of these companies require you to make your monthly payment to them, and they in turn pay your creditors.  You may not learn for months that your money has not actually been sent to your creditors at all.  Most states now require debt settlement companies to register, so contact your state and find out if the company you are considering has done so.  You should also inquire about any complaints that the state may have on file on them.  Another resource is The Association Of Settlement Companies. Settlement companies that are members of this association agree to minimum ethical standards and practices in the operation of their business.  Some consumer advocates suggest only considering the non-profit National Foundation For Consumer Credit.  This organization operates under the name Consumer Credit Counseling Services in most areas. 

Myth #4 – Your Credit Score Will Not Be Affected After Entering Into A Credit Card Settlement

Make no mistake that entering into a credit card settlement will significantly damage your credit score.  Of course, if you are making late payments on your accounts your score is likely already dropping like a rock.  Also, make no mistake, you will not be able to make any more charges to a credit card that you settle.  It is certainly understandable that once you communicate that you are not able to make your payments that you will lose the privilege of making any new charges.  If you need a major credit card be sure and obtain a secured card (requiring a deposit) or a debit card from a local bank (prior to beginning the settlement process).

Myth #5 –  They Are A Christian Debt Settlement Firm, So I Can Trust Them

Many debt settlement firms add ‘Christian’ to their name without living up to any of the principles of Christianity.  Don’t just trust a company because they claim to be a Christian operation.  In fact, you should check them out just as thoroughly as any other debt settlement company.  Many of these firms can end up being wolves in sheep’s clothing.

Credit card companies are not obligated to offer you a settlement and they will only do so if they believe it is in their best interest. In fact, most credit card companies will only agree to settle if they believe that you may end up in bankruptcy if they don’t.  If this is indeed your situation, I would not be the least bit shy about making that clear during your negotiations.  Most unsecured creditors see very little if any money after a consumer ends up in bankruptcy.  It is in your interest and theirs to work out a repayment plan.

Helping you make the most of God’s money!

James L. Paris
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