If you are swimming in credit card debt, are unable to make even the minimum payments each month and have been consistently late on your payments, credit card debt negotiation may be an option you should consider in order to reduce and eventually eliminate your debt. While this option may seem to be the right thing for you, there are many adverse effects that may be caused by doing this. Also, you should be aware that banks may make it very difficult for you to negotiate down your debt. This process is not a quick fix, it may take a few weeks or even months depending on the bank and a lot of phone calls and leg work on your part.
But, if you believe that this is the way to go, you should have as much information about negotiating with your bank before you begin this process. Below is a list of some of your options in negotiating down your debt and included is some of the consequences of doing so.
Lower Interest Rates and Cut Fees
With this option, you request that the bank lower their interest rate they are charging. Remember that if you have had a late or missing payment, your interest rate could have been raised up to twenty eight percent because of it. Reducing your interest will help to lower your monthly payment.
Late fees and other related fees are a great source of income for the banks and asking them to stop charging them to your account may be more difficult to do than lowering your interest rate. Banks will sometimes negotiate on this too though. If your bank is willing to stop charging these fees, you may also want to request that they remove any previous fees they may have charged to your account. Typically, banks will not remove all of the fees charged in the past, but, may be willing to remove a certain number of them.
Lump Sum Settlement
This option is only good for you if you have access to a rather large amount of cash. If you have been repeatedly late with your credit card payments, banks may be willing to work out a deal with you to settle on a percentage of the full amount due. Banks do not like to utilize this strategy as they will be receiving only a small portion of what is owed. This option will probably only work if your credit card debt is high and you have been late a number of times.
If you have a balance due on your account of $4,500.00, you may want to offer the bank a one time payment of $2,500.00 as payment in full on your account. This is where the negotiating comes in. The amount may go back and forth a couple of times until both you and the bank are comfortable with an amount. You will need to have access to money in order to do this because once you have settled on an amount with the bank, they will typically want payment in full within a short period of time. They may also be willing to take it in two payments but that would be the maximum. Failure to pay in the specified time will probably nullify the deal.
Debt Management Consultation Firm
Sometimes people are not comfortable dealing with the banks directly themselves or their bank may have been difficult to deal with. If this is the case for you, then consulting with a debt management firm may be the way to negotiate your credit card debt. They will do the legwork for you, they will contact all of your credit card companies and will negotiate on your behalf. They have the experience and the know how on dealing with banks and will try to get the best deal for you.
Make sure you deal with a reputable company, check them out with the Better Business Bureau in your area. Most of these firms will not charge you any fees until after your debt is settled. There may only be a small set up fee in order for them to start the process.
Possible Adverse Effects
You will want to take all things into consideration when you begin the negotiating process, whether you do it yourself or you opt to hire a debt management consultation firm. You may need to question them to find out what tax or credit score consequences there may be.
Your credit score can be severely affected by negotiating down your debt. Also, if your bank reports any settlements to the credit reporting agencies, your credit score could be affected.
There may be tax consequences in the case of a lump sum settlement. In the example above, you were able to negotiate down your debt from $4,500.00 to $2,500.00, saving you $2,000.00 in debt. If your bank reports this to the IRS on a 1099-C form, you may have to report that $2,000.00 savings as income. Contact your tax advisor or accountant prior to making this type of deal with your bank. Better to be forewarned.
A debt management firm should be able to tell you all of the consequences prior to your making any deal they have negotiated. If they do not, ask before signing anything.
