Statistics from May 2015 show that the average household credit card debt in the United States was $15,863. However, only households that actually carried credit card debt was included in this calculation. If all the households in the United States that carried no credit card debt had been included, the average debt would have been significantly lower – somewhere around $7,400.
Still, credit card debt is the third largest source of household debt in the United States, after mortgages and student loans. In total, U.S. households owed slightly over $900 billion in credit card debt in May 2015. They also owed $8.17 trillion in mortgages and $1.21 trillion in student loans.
With all this debt, it is no wonder that companies that offer help with credit card debt settlements are flourishing. But before you sign up with one of these programs, be aware that debt settlement is not all rainbows and unicorns. In some situations, you are much better off with some other course of action, e.g. debt consolidation or contacting your creditors without any intermediary and negotiate reasonable repayment plans with them. If you show that you are willing to work out a repayment plan, you may be able to negotiate a reduced interest rate and stop the late fees from piling up.
If you need help, contact a reputable credit counseling organization.
Using a credit card debt settling company
There are companies that offer to help you settle your credit card debt, but before you agree to go through with something like this it is advisable to investigate both the company and the possible ramifications a settlement will have on your financial situation in the long run. There are reputable settlement companies out there, but there are also quite a few bad apples. Also, settling credit card debt only advisable in certain situations.
Debt settlement companies will usually offer to negotiate with your creditors and try to convince them to allow you to pay a settlement to resolve your debt. In other words, your creditors will get a lump sum now that is lower than the amount you owe them, and in exchange for that they will remove the rest of your debt. For many creditors, this can be an appealing offer since “one bird in the hand is better than ten on the tree”.
But how will you come up with that lump sum? Most debt settlement companies will ask you to transfer money to them once a month to gradually build up that lump sum. Sometimes this will take a really long time, such as three years or more.
If you are already in a situation where you have a hard time handling your credit card debts, then coming up with extra cash to transfer to the debt settlement company might not be that easy. But here is the kicker – the debt settling company will advise you to stop repaying your creditors and use that money to gradually get together the lump sum instead. After all, you are planning to get rid of all your credit card debts, so why pay your creditors in the mean time?
Of course, this is a very risky road to take. For starters, your creditors are under no obligations to agree to a settlement. No debt settlement company can make any such promises – it is always up to the creditor to make that decision. A creditor can refuse to negotiate, or require a significantly larger lump sum payment than what you have available.
By not making payments, you will dig yourself further down into the hole, because of interests, fees and penalties. Also, not making payments to your creditors put you at risk of dramatically increased interest rates and fees. Sometimes, even creditors that you are still in good standing with will hike up the interest rate simply because you have been singled out as a liability. Not making payments to your creditors will also have a negative impact on your credit report / credit score. Living with a bad credit score / credit report can have a huge negative impact on your life and working your score up to a good place again can take years.
If you stop making payments to a creditor, this creditor can decide to file a lawsuit against you. While most countries no longer have debtors prison, a lost lawsuit can still give the creditor the right to garnish your wages or put a lien on any property that you own or co-own.
What happens if you drop out early?
It is very important to find out in advance exactly what will happen to any money that you have already deposited with the debt settlement company if you stop making payments to them. Will you get the money back? Will the charge you some type of drop-put fee? It is very common for people to drop out of this type of debt settlement programs in advance, e.g. because they can’t find the money to keep on paying or because they realize that they don’t want debt settlement in the form offered by this specific debt settlement company.
Some debt settlement programs are just scams or really poorly managed. They convince you to deposit money and pay their fees, but they will not do much to actually help you handle your credit card debts.
Here are a few red flags:
- The company will start charging you fees for its services early on, rather then charge you for debts that have actually been settled.
- The company promises to make huge debts go away using only a tiny lump sum.
- The company backs up all its wonderful promises by claiming that all this is possible thanks to a marvelous new government program for people with credit card debt.
- The company guarantees that it can make your credit card debt go away. There is no way that a third-party can make such promises, unless they are willing to use their own money to pay off your debt if your creditors refuse to negotiate. Do you think this company would be willing to do that for you? Or do you think it is more likely that they are making exaggerated claims just to suck you in?
- They tell you to break off all communication with your creditors, and they make it seem like doing so is a 100% risk free choice that will have no negative short-term or long-term consequences for you.
- They promise that they can put a stop to all debt collection calls and lawsuits.
- They fail to inform you that in the United States, credit card companies routinely report forgiven (settled) debts to the IRS and you may, under certain circumstances, end up having to pay income tax on the forgiven amounts.