There is a technique that may help tremendously if you are on the brink of despair and seriously considering filing bankruptcy and have already tried techniques such as the snowball and the snowflake. It’s called debt negotiation and in some cases, it can result in wiping out 75% of your credit card debt balances without the need to declare bankruptcy.
How a Credit Card Debt Negotiation WorksCredit card companies, many of which are owned by banks, have several priorities. The first, of course, is to generate profit for the parent company and its shareholders (you may actually be a shareholder through the mutual funds you hold in a 401(k) account without even realizing it).
When it becomes evident that someone may be unable to pay his or her balance, there is a priority shift that happens that can work to your advantage. The bank or credit card company becomes concerned with one thing and one thing only: Getting as much of the balance back from you as possible and closing or restricting your account. Why? This allows them to avoid charging off the amount on their income statement, which would cause their stock to fall, management to get lower bonuses, and perhaps even dividend payments to shareholders to be reduced.
If you declare bankruptcy, it is possible that the entire credit balance will be wiped out because credit card debt is known as unsecured in most all cases. That means that it isn’t backed by any specific collateral, just your promise to repay. (A mortgage on your home, in contrast, is secured by the real estate and failure to pay can cause the bank to seize the asset to recover some of, if not all of, the loan balance.) This would be the worst-case scenario for the credit card company.
If you have missed several payments already and your credit score has been hit, all it takes is a series of phone calls to the company explaining that you are seriously considering bankruptcy but you want to avoid that. You want to make good on as much debt as you can but, frankly, you don’t know if it’s possible. Then, offer to pay off 25% of your credit card debt balance over the next few months in exchange for the company freezing interest costs and closing the account.
You may have to spend several hours, or even days, on the phone working your way up the system. The point is, you need to drive home one concept: You are on the brink of declaring bankruptcy but you want to avoid it at all costs. Tell them you are taking a loan from your in-laws, or cashing in your 401(k), or whatever other story you need to think up to get them to believe that you are coming up with everything you possibly can and this is the best they can hope for because the alternative is likely nothing following a discharge of the debt in bankruptcy court. If you can convince them of that (and I’m assuming it’s true, otherwise you wouldn’t be reading this article on credit card debt), you have a very good chance at reaching a credit card debt settlement agreement.
There Are Costs to a Credit Card Debt Settlement AgreementThere are substantial costs to a credit card debt settlement agreement and it comes in the form of extremely bad marks on your credit score. If you are already missing payments, however, this is unlikely to do any additional damage in a practical sense because you aren’t going to find people that are willing to loan you money with past due accounts – at least not at a reasonable interest rate, anyway.
The bottom line is that a credit card debt settlement agreement can be an effective way for you to avoid bankruptcy court, the credit card company to recover some of their money, and both parties to begin rebuilding the damage done to their balance sheet and income statement from the debacle. Likely, the biggest thing stopping you from considering it, if you are truly desperate to get in control of your finances, is pride. It’s not worth it. Suck it up, take the temporary pain, and begin getting your fiscal life back on track. There is a large minority of Americans that lives free from credit card debt – there is no reason you can’t be one of them.