You're drowning in debt, you don't want to declare bankruptcy or don't qualify, and you've heard that you could settle credit card debts as a way to get out of the hole. But just what is debt settlement, and why are you hearing so much about it? Who can help you do it? And is it right for you?
When you settle credit card debts, you're essentially just bargaining down the amount you owe. In other words, you might go to your credit card company and say, "Look, I can't possibly pay you all of what I owe you, and I really can't afford to keep paying the monthly minimums. Could we work out a deal where I pay you a chunk of my debt and you let me out of the rest?" If the credit card company says yes, you'd pay something like 40 to 60 percent (that's the average) of what you originally owed.
Consumers typically settle credit card debts this when they're on the so-called "credit treadmill." Their outstanding credit card balance is too big for them to pay, so they get stuck making monthly payments on the interest. Creditors love this, as long as it can last, since it guarantees them a steady income. But consumers often can't afford it, as it sucks away much of their income and makes it impossible for them to put a dent in the overall debt.
If you're on the credit treadmill, you can get off at one of only a few places. Your financial situation could improve and you could pay off the debt, though that's probably unlikely. You could declare Chapter 7 bankruptcy, which would liquidate your debts but also ruin your credit, assuming you could even qualify (you probably couldn't). You could declare Chapter 13, but that would impose repayment plans that could leave you no better off than when you started. Or you could try to settle.
There's no time like the present to settle credit card debts. More people are doing it than ever, in part because the economy is so tight, jobs are so scarce, and so many people are swimming in debt they've become unable to afford. The average credit card debt in 2010 was $4,200 per consumer. At the same time, bankruptcy laws make it extremely hard to declare Chapter 7, giving consumers few choices.
Credit card companies are also becoming more accepting of debt settlement negotiations. They've been forced to write off a large number of accounts in this economy, and they'd rather get a portion of your debt than get nothing in bankruptcy or in lawsuits.
It isn't recommended that you try to settle credit card debts on your own, thought it's possible. One problem is that you won't have much bargaining clout. Another is that you'll have to pick your way through the corporate bureaucracy of each credit card company you deal with. And some of those companies will simply shut you out because you don't have professional representation.
Professional debt settlement companies, on the other hand, do nothing but represent consumers in debt negotiations. Their regular business contacts with creditors give them much more clout than you'd have alone and make it much easier for them to cut through the red tape. Settlement companies can also guard their clients against collection calls and other correspondence from creditors.
Debt settlement brings with it some risk, and you should always stay informed, but risk is inherent in any major financial choices, including bankruptcy. For many consumers, the best way off the credit treadmill is to settle credit card debts, and it may be for you too.