If you find yourself with so much debt you can’t keep up, you have a few options to move forward. While some debtors rush to declare bankruptcy, credit balance negotiations may be a better option. Negotiating your credit balance offers some pros and cons. Read on to find out when you should consider credit balance negotiation and how credit balance negotiations work.

What are credit balance negotiations?

Credit balance negotiations are a method some people use to lower their debt. If you have so much debt that you can’t make minimum payments and see no path to debt freedom, it’s time to consider credit balance negotiation.

In a credit balance negotiation, the debtor is asking the credit card company to accept a lower payment for all debt now rather than wait and hope for a full payment later on. This is often referred to as a debt settlement. In other cases, the creditor may be willing to lower your debt or freeze your balance in exchange for your getting on a repayment plan.

In some cases, the creditor will offer a forbearance, which is a temporary pause of all payments to give you time to get back on track. Some creditors may be willing to freeze your balance during this period and not charge additional interest, while others will allow you to skip payments while your balance continues to grow due to compound interest.

To reach a debt settlement, the borrower must be ready to pay off a portion of the debt today while the remainder is discharged. If the debtor can afford to make a one-time payment, one that is lower than the total balance but still a significant portion of the total debt, to make the entire credit card balance go away, a debt settlement may make sense.

Do it yourself or get help?

If you decide credit balance negotiations are right for you, you shouldn’t just call up the credit card company and ask for a lower balance. You should prepare ahead of time to ensure you get the best result. Remember that the creditor wants to get every dollar possible, so you shouldn’t go into the discussion unprepared.

Some people under a mountain of debt choose to hire a company to help them get out of debt and negotiate their balances. There are many lawyers and legitimate companies ready to help you with your debt negotiation. Just beware that the industry is riddled with scammers. If you have to make large payments to the assistance business ahead of time, it is a bad sign.

According to the Federal Trade Commission (FTC), these are signs of a debt settlement scam:

  • The company charges any fees before it settles your debts.
  • The company touts a “new government program” to bail out personal credit card debt.
  • The company guarantees it can make your unsecured debt go away.
  • The company tells you to stop communicating with your creditors, but doesn’t explain the serious consequences.
  • The company tells you it can stop all debt collection calls and lawsuits.
  • The company guarantees that your unsecured debts can be paid off for pennies on the dollar.
  • If the idea of a scam scares your more than your credit card debt, you are not alone nor are you out of options. You can absolutely enter into your own credit card or other debt balance negotiations without hiring any firm or lawyer to represent you.

When you go into negotiations to lower your debt, remember the leverage you have. The bank wants to get paid back. If you are dealing with credit card debt, it is most likely not secured. That means if you don’t pay or you declare bankruptcy, the bank will get nothing. All they can do to you in return is destroy your credit, which is probably already in bad shape if you are considering a debt settlement, and sell the debt to a debt collector. Odds are they would rather get something than nothing.

The actual negotiation generally requires several phone calls and may include a handwritten letter or agreement. If you play your cards right, the debt holder may be willing to forgive as much as 75% of the outstanding debt.

Be sure to tell the credit card company that you are considering filing for bankruptcy, as bankruptcy may mean your entire debt is wiped clean by the bankruptcy court and the bank would get nothing. Explain that you are trying to work out a deal so they get something back, rather than nothing at all. If all goes well, your discussions will lead to a much lower debt balance and a viable path to debt freedom.

How credit balance negotiations are helpful

Credit balance negations are good for one primary reason: they lower your debt. If you have a $10,000 balance and can get the bank to forgive 75%, that is a $7,500 savings and you would only owe $2,500.

That can be a huge savings depending on your current debt and what you are able to have forgiven. Remember that not all negotiations lead to a 75% savings. Some lead to no savings at all.

While lowering your debt is financially beneficial today, it may not be in the long-run. Debt settlements have downsides as well.

The downsides of credit balance negotiations

Don’t rush and call your bank just yet. There are some big downsides to a credit balance negotiation. When you tell your bank you are having financial difficulties, you can expect them to cut off your credit lines immediately. If you get the settlement agreement, you have to deal with the fallout of a lower credit score.

When you enter into a debt settlement and a portion of your debt is discharged, that discharge shows up on your credit report. Back when I was approving credit card, line of credit, and mortgage applications as a bank manager, I would automatically turn down any application that had a recent debt discharge or settlement. If they did it before, odds are they would do it again and my company didn’t want to be left paying off their credit card bill.

You can expect a debt settlement or discharge to impact your credit for at least seven years, so don’t rush and look for a settlement if you plan to buy a home with a mortgage, buy a car with a loan, or open any new credit cards in that time period.

Weigh the pros and cons

If your debt is out of control, a debt negotiation is certainly one option to move forward. But with limited access to credit and severe damage to your credit score, you should not rush into a negotiation before carefully deciding if a debt settlement or debt payoff plan is right for you.

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