The U.S. has seen consistent growth in four primary areas of debt — home, auto, student loans, and credit cards. More than 191 million Americans have credit cards.
The average credit card holder has at least 2.7 cards; the average household credit card debt is $5,315. NewYorkFed.org says the total U.S. consumer debt is $15.9 trillion for the first quarter of 2022.
That’s a lot of debt. You probably feel overwhelmed and have some debt that you are trying to figure out how to get out from under. Here are some options for you.
Can I Settle Credit Card Debt for Less Than I Owe?
Maybe. That’s the goal of debt settlement.
Reputable debt settlement companies should have a solid track record and provide an estimate of how much you can expect to pay, plus how long the process will take.
- Credit card debt settlement will work best if you have multiple accounts in collections
- You won’t pay any fees unless your debts are settled, thanks to an advance fee ban enacted by the Federal Trade Commission (FTC) in 2010
- Settlement fees can be expensive compared to other debt-relief options
- The closer your debts are to the statute of limitations, the more leverage the settlement company will have during negotiations
- Credit card debt settlement can provide, on average, $2.64 in savings for every $1 you pay in fees
- More than 98% of settlement offers included a total that decreased the overall debt that offset the settlement company’s fees
Best Credit Card Debt Settlement Companies
Debt settlement programs typically are for-profit companies and involve the company negotiating with your creditors to allow you to pay a “settlement” to resolve your debt. The settlement is a lump sum that’s less than the total amount you owe. The program asks that you set aside a specific amount of money every month in an escrow account to accumulate enough savings to pay off a settlement that is reached eventually.
Debt settlement requires you to stop making payments to your creditors, which will harm your credit scores. If you are concerned about this, you will want to look into a debt management plan.
Consolidated Credit Solutions
They have been around since 1994 and have helped over 6.5 million people. They are one of the largest credit counseling agencies in the U.S. and have an A+ rating with the Better Business Bureau.
Consolidated Credit also offers educational resources to improve its customers’ financial literacy, particularly regarding credit cards and debit. These resources include webinars, debt-to-income ratios, credit score calculators, and articles on various financial topics. Consolidated Credit also offers a community outreach program to provide financial education and consolidate debt for its clients. It has built a reputation for professionalism, offering CPFC-certified debt counselors and free debt consultations for potential clients.
Debt Reduction Services
Debt Reduction Services is a nonprofit organization licensed to offer debt relief assistance in all 50 states. This company offers services like credit counseling and debt consolidation. Their primary option is debt management plans.
Debt Reduction Services was founded in 1996, and many of its services are free of charge, such as budget planning and credit counseling. Their certified debt counselor will also help you develop a household budget that will work with your lifestyle and goals.
Their debt management plan can help you reduce your monthly payments by up to 50% and interest rates by 75%. Unlike debt settlement, debt management plans typically do not harm your credit score. Enrolling in a program could even improve your credit substantially. They have a client dashboard that makes it easier to track your debt payoff progress in real-time.
New Era Debt Solutions
New Era Debt Solutions has been a BBB accredited business since 2001 and has an A+ rating. They are a highly rated debt relief firm that can help you settle and pay off unsecured debts in three years or less. Founded in 1999, this company claims its customers complete their debt settlement plans within 28 months on average. They don’t charge upfront fees, and you can start the process with a free consultation. New Era Debt Solutions does not charge any upfront fees to create your debt relief plan. Instead, they charge fees for each debt they settle.
It is not available in every state, and they do not disclose the fee range for debt settlement.
Accredited Debt Relief
Accredited Debt Relief claims it can settle the debt in as little as 12 months, a faster turn-around than many other debt relief companies, but guarantees settlement within 46 months. They settle only unsecured debts with a minimum of $10,000 and no upfront fees. Fees are performance-based and contingent upon reaching a favorable settlement with creditors. Prices range from 15 percent to 25 percent of debt balances at enrollment.
Freedom Debt Relief
Freedom Debt Relief is an accredited debt settlement company providing nationwide debt relief through debt settlement services and education. The company requires applicants to have at least $15,000 of unsecured debt. The business has served more than 800,000 consumers and resolved more than $15 billion in debt since 2002. They help you pay off unsecured debts from credit cards, medical bills, and unsecured personal loans. In some cases, you may settle credit card debt for 50% of what you owe or even less. They say they can help you resolve your debt in two to four years.
They charge a fee typically worth between 15% and 25% of the debt, with an average cost of 21.5%.
American Consumer Credit Counseling
American Consumer Credit Counseling is a nonprofit agency that helps consumers get their finances under control. It offers credit and bankruptcy counseling as well as a debt management program. They focus on assisting customers with all forms of unsecured debt relief.
ACCC offers free financial counseling sessions for consumers struggling with unsecured debt. A qualified credit counselor reviews your income, expenses, assets, and liabilities. Then they lay out possible courses of action and provide helpful resources, including educational materials and social service referrals. Depending on your financial situation, the company may suggest enrolling in its debt management program, which is available for a small monthly fee. Its debt management program lasts for four to five years.
If you join their debt management program, they charge a one-time payment of $39 and a monthly maintenance fee that ranges from $5 to a maximum of $50. The company may waive or reduce these fees if you show financial hardship.
American Consumer Credit Counseling also offers the following services:
- Budget counseling
- Bankruptcy counseling
- Student loan counseling
- Housing counseling
National Debt Relief
National Debt Relief works with consumers who have at least $7,500 and up to $100,000 in unsecured debt from credit cards, personal loans and lines of credit, medical bills, business debts, and private student loan debts. According to the company, they are a debt settlement company that reduces your enrolled debt by 30% net after its fees. The company says customers complete their debt settlement program within two to four years.
Their fees vary between 15% to 25% of your total enrolled debt, depending on the amount you owe and the state you live in.
National is not available in these states: Connecticut, Georgia, Kansas, Maine, New Hampshire, Oregon, South Carolina, Vermont, and West Virginia.
Pros of Credit Card Debt Settlement
- You’ll end up paying less than you owe
- It could be the cheapest option
- When you’re finished, the settlement will reset your financial situation
- It could keep you out of court and prevent wage garnishments.
- You can avoid a bankruptcy filing, which will hurt your credit for ten years.
Cons of Debt Settlement
- You’ll have to be thick-skinned: Creditors will continue to attempt to collect the outstanding debt and could get threatening.
- Mounting interest and late fees if you stop making minimum monthly payments
- There are no guarantees your creditors will settle your debts, and you may be contacted by debt collectors or even be sued by creditors during the process.
- Your credit report and credit score will take a hit for seven years because the credit reporting companies will report the account as “settled.”
- The forgiven debt may be considered taxable income. Forgiven debts over $600 may be counted as income on your taxes.
What Percentage of Credit Card Debt Can be Settled?
The Center for Responsible Lending says that, on average, debts are settled at 48% of the outstanding balance. The report also says that balances could increase up to 20% due to fees from the credit card company during settlement negotiations. And most debt settlement companies will charge a percentage of the settled debt.
How Does Debt Settlement Stack Up Against a Debt Management Plan?
Debt settlement companies are typically for-profit and ask you to stop making payments to your creditors while they negotiate to lower the total outstanding balance you owe. The company will charge you 15%-25% of the amount settled. Typically, you will owe 50% to 80% of the balance. While you stop making payments, you will begin to receive collection calls, and the late payments will be reported to the three major credit bureaus and will remain on your credit report for seven years. Your credit will be damaged and could also have some tax implications with the IRS because the forgiven debt is reported as income.
Nonprofit credit counseling companies do debt management plans and negotiate with your creditors to reduce your interest rates and fees or lower monthly payments. You still pay off the principal amount, so your credit score is not impacted as it would be with debt settlement. Credit counselors will also help you improve your money management skills and develop a workable budget.
Want to try to negotiate with your credit card company on your own? Here are some tips:
What if My Credit Card Company Refuses to Settle?
No matter what some debt settlement companies might tell you, creditors are not legally obligated to negotiate the outstanding balance on credit cards or any other loans. But they usually will because with a settlement, they’ll recover more funds than they’d get through other collection methods, including a collections agency, or if you mention bankruptcy.
The Downside: Credit Card Debt Settlement and Your Taxes
The IRS could consider the settlement amount taxable income, and you may have to pay them for your forgiven debts.
What Happens If I Default on My Credit Card Debt?
The creditor will turn over your debt to a debt collector or collection agency, and you’ll start to get harassing phone calls. Debt collection is regulated, and you have rights through the Federal Trade Commission (FTC) through the Fair Debt Collection Practices Act.
Will I Go to Jail If I Don’t Pay My Credit Card Debt?
No. But you could go to jail for other reasons, like missing a court date. The credit card issuer could also take you to court, and a judge could garnish your wages.
Other Credit Card Debt Relief Options
- Chapter 7 Bankruptcy: Chapter 7 won’t discharge student loans or what you owe the IRS. You will have to pass a means test to be able to file for a Chapter 7, and bankruptcy will damage your credit score for up to 10 years. It would be best if you only used bankruptcy as a last resort. Consult a bankruptcy attorney. Using an attorney can cost $800-$4,000.
- Debt Consolidation Loan or Personal Loan: Debt consolidation rolls all outstanding debts into one monthly payment, usually with a lower interest rate. Because you’re rolling multiple debts into a single loan, this is referred to as “consolidating” your debt. The main goal of debt consolidation is to pay off high-interest debts first, like credit cards and payday loans. A personal loan is a loan from a bank, credit union, or online lender. These loans are issued in a lump sum, deposited into your bank account, and considered a form of installment credit. It is repaid in fixed monthly payments, usually over two to seven years.
- Request Overtime or take on a Side Gig: Taking on a side gig can be lucrative and quickly get you out of debt. Do freelance work or consulting, pet sit, drive for a ridesharing service, tutor, set up an e-commerce or drop shipping business, etc.
The Bottom Line
Credit card debt settlement may not be the right option for everyone, especially if you don’t want to harm your credit history. A debt management plan may be a better option to look into to avoid ruining your credit. If this is not a viable option, then do your due diligence on the best debt settlement company that fits your needs.
Chapter 7 is also known as “liquidation bankruptcy” and can erase many types of consumer debt, including credit card debt and medical bills. The bankruptcy trustee collects and sells the debtor’s nonexempt assets and uses the proceeds to pay off creditors. Nonexempt assets can be sold by the trustee assigned to your case by a bankruptcy court. There is no repayment plan. You must pass a means test that looks at your income, expenses, and assets.
Chapter 13 bankruptcy plan involves repayment and is reserved for people with stable incomes who are appointed a trustee that will handle distributing the monies to the creditors over a three-to-five-year period. The monthly payment is based on what you can afford to pay.
The most obvious sign of a debt relief scam is if the person/company offers to help get rid of your debt, but first, you have to pay them a fee.
If you receive a robocall from the company saying they can wipe out most of your debt and will try to get all your personal information during the initial call.
The company encourages you to cease all contact with your creditors, and lastly, you can’t find much information about the company and its services. And the company will refuse to send you information about its services until you provide financial information, such as credit card account numbers and balances.
While secured debt uses the property as collateral to support the loan, unsecured debt has no collateral attached to it. Common types of unsecured debt are credit cards, medical bills, most personal loans, and some student loans. Secured debts are mortgages and auto loans.
Your credit score is your purchasing power. It dictates your ability to get a loan, secure housing, and sometimes even a job.
Good credit shows that you are responsible and possess healthy financial habits by paying your bills on time and keeping debt minimum. Lenders take a risk on you when they give you a loan. Lenders determine your creditworthiness by scores derived from the three credit reporting companies. These scores dictate the loan rates you will receive. The higher your score, the better your interest rate and the cheaper the overall cost of the loan will be to you. It’s important to regularly monitor your credit reports to ensure that mistakes aren’t dragging your score down.