Settling credit card debt is an option that you may be able to take if you have long outstanding credit card debts where you are not able to make your monthly minimum payments.

What Is Debt Settling?

Once a creditor can tell from their records that you have not paid anything for some time, and they figure it is highly unlikely they will get the full amount of the debt plus interest from you, they may send a debt settlement offer.

A debt settlement offer is when a creditor will write an offer where you can pay perhaps 50% of the debt and they will write off the rest. Normally the creditor will want the full settlement amount all in one payment, but if it is a large amount they may accept it in two or three installments.

You may receive the debt settlement offer from a debt collection agency. This can mean that your original lender has signed over the debt to the debt collectors, or it may simply mean that the agency is working for a percentage of whatever they can recover.

Why Do Creditors Send Debt Settlement Offers?

The finance companies offer debt settling when they can see that you are having so much trouble making payments, they might have to take you to court to get money owed, and want to avoid you filing bankruptcy, which means they get nothing.

So they have a choice between incurring the cost of court proceedings and perhaps still getting nothing from you, or offering you a settlement of 50% or so. They figure they will be better off accepting half of what you owe, than trying to get the full amount through the courts.

Whether you should accept the debt settlment offer depends on many factors.

First, you should be aware that accepting a debt settlement offer will affect your credit score in a negative way, because you will not have paid off your whole debt. If you can pay the full amount then it is better for your credit history to do so. However, you probably would not have gotten to the point of receiving a debt settlement offer if you could pay in full. Accepting the debt settlement offer is usually 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 will be the consequences of that? Would you have to miss rent payments and perhaps lose your home? Think carefully about how you can raise the funds needed for settlement.

Third, even if you decide to accept the offer, it may be worth trying to negotiate a lower settlement. This means calling your creditors and saying that you cannot pay what they have asked for but you could pay perhaps 40%. Negotation is often worth trying because it can save you some money without extra penalties.

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

Be aware that if you decide not to accept the offer, then after a while the creditor will most likely take the matter to court. A court may judge that you must 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 need to be sure this is full settlement and the creditor will write off any additional debt, so they have no right to come back to you in future demanding more.

When everything is complete, check out what has been 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 all of your correspondence. So keep all of the paperwork when you accept any debt settlement offer.