 Negotiating
a debt settlement
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 Dear
Dr. Don,
Will credit card companies be willing to settle
for 50 cents on the dollar to clear up an existing account so I
can avoid bankruptcy?
-- Frank Finesse
 Dear
Frank,
If you're current on your bills, credit card companies aren't going
to negotiate with you and accept 50 cents on the dollar. If they've
already written off your account, they may be willing to negotiate
and accept partial payment.
With partial payment the ideal situation is to negotiate
with the creditor to accept both partial payment and list your account
with the credit bureaus as "paid as agreed" or "paid
in full." That's what clears up the existing account on your
credit report. Just negotiating a partial payment saves you money
but hurts your credit. The negative information stays on your credit
report for seven years versus 10 years for a Chapter 7 bankruptcy
filing. Getting the creditor to say that you "paid as agreed"
when you didn't isn't an easy task.
A debt settlement negotiator makes it sound like they
have an edge in getting the unsecured creditor to agree to list
the account as "paid as agreed" or "paid in full,"
but offer no guarantee that they can accomplish this feat.
The debt write-off is considered taxable income and
you will owe income tax on the amount of the write-off. The Bankrate
feature, "The
tax trap of forgiven debt," has more on this unexpected
expense.
Debt settlement is often seen as an alternative to
bankruptcy and as an intermediate step between credit counseling
and bankruptcy. Credit counseling doesn't reduce the debt; it just
sets up a repayment plan working with the creditors. A Chapter 7
bankruptcy discharges all eligible debts, but creditors are entitled
to the proceeds of a bankruptcy estate established with the debtor's
nonexempt assets. A Chapter 13 bankruptcy filing establishes a court
approved repayment plan that lasts for three to five years before
remaining eligible debts are discharged.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "Financing
a home," "Saving & investing" or "money."
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