Credit Card Debt Settlement When You Cannot Pay Your Bills

Reader Question: I am in financial crisis and cannot pay my overdue credit card bills. Is there any way the card companies will lower the interest rate or let me pay less? Or will they be able to settle in some kind of way?

There are always ways to settle credit card debt. Just keep in mind that any form of debt settlement will have a negative impact on your credit score. Anytime you hear the word "settle" used in this context, it means you are paying less than the full amount owed. For many people, this ends up being the only viable option. And if your credit score is taking a hit anyway (from all of those overdue bills), then a credit card debt settlement may be something to consider.

I usually recommend settlement as a last resort, or at least a secondary option after you've tried other things. The first and best step is to come up with a budget that allows you pay your credit card balances in full. But when the debt becomes too large, with too much interest on top of everything else, this can sometimes be difficult.

Credit card companies will often agree to settle the outstanding debt in some way. In their eyes, some kind of payment is better than none at all. Often, this type of settlement involves a lump sum payment or monthly payment plan on the part of the customer, and in exchange the card company will waive some of the fees and/or interest. In some cases, the fees alone can account for 30 - 40% of the overall balance, so it's a pretty significant reduction on their part.

If I had to create a scale of best options to worst options for handling credit card debt, it would look something like this:

• Best option - Managing finances to avoid debt accumulation.
• Second best - Creating a payment plan to pay down the debt.
• Third best - Settling the credit card debt in agreement with the card company.
• Fourth best - Filing for bankruptcy.
• Worst option - Ignoring the problem altogether.

This shows you where I would place credit card debt settlement in the grand scheme of things. It's not the best option, but sometimes your options are limited by circumstance. I realize that. I would always recommend working with a nonprofit credit counseling agency first, before attempting any form of settlement.

Here's the difference between these two strategies:

• Credit Counseling - These companies will help you come up with a payment plan and budget that allows you to chip away at your debt. With this approach, the payment will typically go straight from you to the creditor (i.e., you won't send the money to a middle man).
• Debt Settlement - Also referred to as "debt negotiation" companies, these organizations try to arrange a settlement with the credit card company on your behalf. They typically charge up-front fees and will have you make payments directly to them, so they can in turn handle the payments to your creditors. Be wary of these services.

If you do decide to try and settle your debt with the card companies (as opposed to paying the balances in full), you'll need to consider the following:

1. Will you help yourself, or seek professional guidance?

There are private companies and nonprofit organizations that specialize in helping people with debt settlement / negotiation. If you have a large amount of debt, or if you hold credit cards from many different companies, it might be best to have professional guidance.

2. If you seek professional help, watch out for sharks.

Unfortunately, many of the companies mentioned above will take advantage of people in debt situations. Click here to see what I mean. They will make bold promises, such as claiming they can settle all of your debt without having it affect your credit score (nearly impossible). They'll claim that they can help you get your debt paid for only 25% of the total balance due (or 10%, or 30 or 50%). In truth, these companies cannot force a creditor into an agreement. So you need to make sure that any type of credit card debt settlement is approved by the original creditor.

I'd like to think that there's a legitimate credit / debt counseling organization for every bad one. But I don't know if that ratio holds true or not. In any case, there are some legitimate companies who can help you negotiate a settlement with one or more of your creditors.

3. Research debt negotiation companies before using them.

The FTC recommends that you check a company out through the Better Business Bureau and your state Attorney General, before doing business with them. Because of all the credit counseling scams (that used to be much more prevalent in the past), most states in the U.S. cracked down on these companies and began to require licensing. So check with your state Attorney General's office on this. They have an obligation to help you, as a resident and taxpayer.

Does that help you out some? I hope so. If you have a follow-up question, just submit it through the same box where you typed the original question.

Related Q&A sessions:

• Where should I start when paying off credit card debt?
• How do I set up a debt payment plan for overdue accounts?