How to Negotiate a Credit Card Debt Settlement: The Process

By Cara O'Neill, Attorney
You can increase the chance of settling your credit card debt for less than what you owe by following tried-and-true settlement techniques.

Successful credit card negotiations follow certain rules and unfold over time. Knowing what to expect will help you plan your strategy and maximize your chance of achieving your debt settlement goal. In this article, you’ll learn about tried-and-true negotiation techniques, the tax ramifications of credit card settlement, and why you might want to file for bankruptcy instead.

Who Owns the Debt: The Credit Card Company or a Debt Collector?

When you’re behind on a payment, your credit card company will likely attempt to collect from you for up to six months. If you don’t bring your debt current within that time, you can expect the original credit card company to “charge off” (sell) your debt to a professional debt collector for a discount. It’s important to appreciate the importance of who owns the debt because the original creditor and the debt collector negotiate in different ways. What you’ll be able to achieve often depends on whether you’re dealing with the original creditor or a company who’s bought the account. Here are examples of what you might expect to happen at each of these two stages of the process.

The credit card company still owns the debt. You’ll likely be asked to provide proof of your income and assets before the company will consider a reduction of any kind, and if you have assets or a job, don’t expect to get a break. Also, you should realize that any information you provide will likely be used to collect the debt—to your disadvantage—at a later date. Specifically, if the creditor gets a money judgment, it will already have the information it needs to take money out of your bank account (bank levy) or paycheck (garnishment). (To better understand the collection process, read Delinquent Debt: What to Expect in Debt Collection and Delinquent Debt Lawsuit: What to Expect When a Creditor Sues You.)

A collection agency has bought the debt. After the original creditor charges off your account, you’ll remain responsible for the full value of the debt, but instead of paying the balance to the original creditor, you’ll pay the collection agency. A collection agency is more likely to settle your debt for less than what you owe because it bought your debt at a discount. The negotiation tips that follow tend to work best with a debt collector.

Choosing Your Settlement Number

First, you’ll decide how much you’re willing to pay to settle your debt. You’ll want to choose the highest amount that you can tolerate so that you feel comfortable walking away from the negotiation if it doesn’t go as planned. If you skip this step, you’ll run the risk of getting caught up in the process and paying more than you might intend to pay. For instance, if you owe $10,000, and know that you don’t want to spend more than $6,000 to settle the debt, $6,000 will be your highest settlement number.

Negotiating the Debt: Starting Low

People who regularly negotiate assume that you’ll start with a low number and gradually increase your offer—not start with the highest number you can tolerate. Therefore, don’t expect your opponent to be satisfied settling for your initial number. You’ll want to start by offering a lower settlement amount than what you’re willing to pay. For instance, suppose you owe $10,000 and your settlement tolerance (the most you’ll pay) is $6,000. But you don’t want to pay more than you must and hope that the creditor will settle for $3,000. To give yourself the negotiating room you’ll need to work up to $3,000, you’d probably want to start low by offering $1,000.

Refusing to Bid Against Yourself

“Bidding against yourself” happens when you raise your offer without waiting for the other side to respond with a counter offer (their suggested settlement number). Your opponent might try to badger you into bidding against yourself by saying something like this: “Three thousand dollars is unreasonable. You’re going to have to come up with more money. Give me another number.” The best approach is to decline the request and ask the other side to counter instead. Asking someone to bid against their offer is one of the easiest ways to measure another person’s negotiating skills and to raise the opening bid without making a counter offer. Although you can count on it happening, you won’t want to fall for it.

“Respecting the Process” so You “Don’t Leave Money on the Table”

Don’t be surprised if you must call your creditor multiple times before reaching an agreement. You and the creditor will be more inclined to settle after exchanging multiple offers and exploring whether there’s an opportunity for a better deal. As often said in the negotiation world, a good negotiation requires you to be patient and “respect the process” so that you “don’t leave money on the table” (settle for an inferior deal).

Calling at the End of the Month With a Lump Sum Offer

Debt collection agencies typically expect employees to meet monthly quotas, so your chance of a lower settlement increases toward the end of the month. Also, a collector will be more interested if you offer to pay the entire settlement amount in one lump sum payment. A larger amount of money now is more enticing than a payment plan over time.

Getting the Settlement Terms in Writing

Once you reach an agreement, you’ll want to get the terms of your settlement in writing before paying the settlement amount. The letter should state the amount the creditor will accept in satisfaction of your obligation and the date you must pay the funds. If you skip this step, you’ll have a hard time proving the existence of the agreement.

Tax Consequences of Cancelled Debt

Under federal law, creditors must report canceled debt to the IRS, so if you successfully negotiate down your debt balance, you’ll receive a 1099-C for the forgiven amount at the end of the year. In other words, plan to pay taxes on the canceled debt. If the credit card company forgives enough debt, you might find yourself facing a significant tax bill—and it isn’t easy to get rid of tax debt. In most cases, you’ll have to pay it.

When Bankruptcy Is a Better Option

If you owe enough credit card debt, bankruptcy can have a distinct advantage over negotiating down your debt. Why? Because you won’t pay taxes on credit card debt that’s wiped out in bankruptcy. If you’re not sure whether you should settle your overdue account or file for bankruptcy, you’ll want to consult with a professional. A bankruptcy attorney can assess your financial situation and determine whether you’d benefit from a Chapter 7 bankruptcy, a Chapter 13 bankruptcy, or debt negotiation.

Questions for Your Attorney

  • Would I be better off negotiating down my debt or filing for bankruptcy?
  • I’m not comfortable negotiating my account—can an attorney negotiate on my behalf?
  • Should I file for bankruptcy if some of my creditors won’t agree to cancel a portion of my debt?
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