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How to settle credit card debt

When you are badly in arrears with your credit card debts, and the debt has been sold or passed on to the debt collectors, sometimes they phone you and say "If you are able to settle now, we'll give you a 30% discount, in other words you only have to pay $xx,xxx".  This usually seems like a cruel joke to the person in debt because of course if they actually had several thousand just lying around they wouldn't be in the mess they are in.
 
However, it's useful to know that the debt collectors are willing to settle for less than the face value of the debt. They do this to save themselves the administration costs of collecting the whole amount from you over decades. Here's how to make this work for you:
 
If you are seriously in arrears - i.e. you have gone through all the steps outlined on the debt management plan page, done your budget and even after cutting back you haven't got enough money left over to meet the minimum payments on your debts, you need to contact the debt collectors/credit card lenders, and ask them to freeze your interest payments and accept a lower payment. You will usually have to put your request in writing, enclosing a copy of your budget. Most will agree as they would rather they got some payment than nothing, especially if the debt has been sold to a debt collector.
 
Once you have got your debt repayment plan in place, you need to meet the payments agreed without fail each month, otherwise the phonecalls will start again. You then need to do absolutely everything in your power to raise some money to settle the debt - be warned, this is NOT easy.
 
1. Open a savings account with an institution unconnected with the banks/lenders who lent you money (it's important to keep this money separate as if you have debts, most banks will help yourself to any savings you have with them to pay down those debts). This is the account you are going to save money in to try to settle your debt.
 
2. Go through your budget and see if you can cut something back further so that you have freed up at least $50 a month, over and above your debt obligations to save to this savings account. Don't worry if the amount is small, we all have to start from small beginnings.
 
3. Next think about ways to raise money. Here are some ideas:
  • Pursue a promotion or payrise at work. This is incredibly difficult in the current recessionary climate, but give it a go anyway - what have you got to lose?
  • Look for a better paying job - again this is hard in a recession, but try anyway. If you have brushed up on your skills, your CV looks professional, you have taken exams (professional or otherwise) to improve your education, you will stand out from the crowd
  • Think of taking in a lodger. Most people balk at this one, as having someone else in your home can reduce your privacy. But you are not in a position to be precious about it. If your children each have separate rooms, see if they can room together so you can let one room out. Or your could move the baby's cot into your bedroom, and rent the nursery out. If your spare room is being used for junk, now is an ideal time to clear it out and rent the room out. In this economy there is quite a lot of demand for single rooms out for rent (from the lodger's point of view, it's cheaper than renting a flat). Set some ground rules at the start to make sure that the experience turns out as satisfactory as possible.
  • Get a part-time job for the evenings or weekends. Even in this economy there are some jobs going because people feel too grand to do them. Don't be proud - take those cleaning jobs, pizza delivery jobs etc. It's money, and brings you that much closer to becoming debt free.
  • Try to earn online. Please note that selling goods online (affiliate marketing) or writing supported by advertising is HARD. No easy money here. But you should be able to earn something. A word of caution: don't buy anyone's "guaranteed get rich quick" ebook or course. There is a ton of free quality information online as to how to earn, you just have to look for it. Not to mention the trial and error method of earning. The key thing here is spend time on this but not money.
  • Go through your home and see if you can sell things. Not just that old lawnmower you don't use, but things like clothes, DVDs, old dolls etc.
  • See if you can start a neighbourhood lawn-mowing service or a car cleaning service. Again, this is backbreaking work after a few hours - but because it's so hard, you won't have any competition apart from the hungry motivated immigrants. Gentler jobs include baby-sitting and ironing.
4. Once you have raised your money you need to contact the debt collector/lender and talk to them about debt settlement. As them to put an offer in writing to you, which includes the words "full and final settlement". These words are important, because otherwise you are just making a partial payment and will still owe the rest. When you receive their offer letter, you need to reply, stating that with reference to their letter dated xxxxxx, you are accepting their offer of a full and final settlement of the debt and enclosing a check for the amount of $xx,xxx. Again, you must include the words "full and final settlement", just so it's clear. Photocopy the letter, and then send the original with the check by certified mail. Make sure you keep the photocopy and the proof of postage in your records, just in case they suddenly turn round and decide you haven't made a full settlement.
 
5. Some people ask how much you can settle debts for. Debt collectors will usually accept 70% to 80% of the amount of the debt. Sometimes you can go lower, but you have to negotiate this. Don't get your hopes up about writing "most" of it off though. Life just doesn't work like that.
 
Please note that settling debt for less than the amount owed is only for those who are seriously in arrears. It's not available for those who can manage their debts but simply fancy paying less. The lenders are not stupid - they won't fall for people trying to game the system.