Q. What is the different between a debt workout and a debt consolidation for reduction or elimination of credit card debt and other unsecured debt?
A. Credit card debt workout as a negotiated settlement of credit card debt. For example if you owed $5,000 on a credit card and made an agreement with the credit card company to pay $2,000 instead of $5,000 as settlement in full on the debt, this would be a credit card debt workout. Also known as, debt management, debt reduction, debt relief, debt workout, debt settlement or a host of other names inferring help with debt even sometimes including debt consolidation. However, I define debt consolidation as a reorganization of the debt through a credit counselor or taking a debt consolidation loan to pay of the debts in full. Other FAQ’s on this site address each of these debt elimination options individually.
Q. Who is eligible for a debt workout to get out of credit card debt?
A. Creditors agree to debt reduction arrangements where they feel a settlement of the debt will be in their best interest. In most cases they come to this conclusion because the person requesting the debt negotiation appears to be a legitimate candidate for bankruptcy. Knowing that in most bankruptcy cases they would receive nothing, they opt to take a discounted settlement on the debt rather than receive zero dollars in a bankruptcy. The consumer gets debt relief, the creditor get some money, and everyone ends up better than their worst options.
Q. What kinds of people appear to be bankruptcy candidates to the creditors?
A. 1) People who show an inability to pay their debts as evidenced by their failure to make payments for several months on their credit cards and other obligations.
2) People whose current or future income do not allow them to reorganize their finances either through a Chapter 13 or a plan outside of bankruptcy.
Q. How do the creditors find out about this personal information?
A. When you applied for credit, in most cases, you authorized the creditor to review your credit report. The creditor obviously knows of your payment history with them. The credit report will allow them to see how you are treating all of your other creditors. If you were delinquent with all of your other credit card debts it would seem to indicate that you do not have the ability to pay anyone including that particular creditor and you indeed require debt relief.
Q. Would a typical credit card debt account accept to pay off the debt?
A. Most of credit card debt accounts settle in a range of 30 to 50%.
Q. What would determine differences in the debt reduction amounts?
A. While a person’s own financial situation would have an important effect on debt reduction figures the next most important factor would be the internal debt settlement policy of the creditor.
Q. Do credit card debt settlements need to be made all at once to achieve debt elimination?
A. No, there are two significant exceptions that debtors should be aware of. First, in some cases the creditors will arrange a short payment plan, especially with larger amounts of credit card debt, anywhere from 3-6 months. The other exception comes in the form of special debt management or debt reduction, which arrange to stretch debt settlement plans out of a period of one to four years.
Q. Can a person achieve these credit card debt settlements on their own?
A. While it is certainly possible for someone to achieve a credit card debt settlement on their own, it might not be in their best interest to do so. In the first place creditors do not take the situation nearly as seriously when a debtor calls to make a settlement as when a debt relief professional does. An individual would not know how to negotiate a debt settlement or what a proper debt settlement would be. A debt management professional working in this field would know most individual creditors including what their standard acceptance offer would be, how to properly complete financial forms and know what and what not to say. Credit card debt settlements are best achieved when the creditors standard operating procedures and formats are followed.
Q. What if the creditor initiates a credit card debt settlement offer directly to the debtor?
A. In most cases the first debt settlement letters coming from the creditors are initial attempts to make contact with the debtor. A typical case would be a creditor offering a settlement of 75 or 80 cents on a dollar. In almost all cases debt settlement can be achieved for far less than the offer made in these initial contact letters from the credit card companies.
Q. How long does the card debt settlement process take?
A. A normal credit card debt settlement case might take three to nine months. If someone wanted to expedite the situation it could be shortened to one to three months. Someone wishing to stretch things out could find the time extended to twelve to eighteen months. Some special debt management and debt reduction firms can even lengthen the process to four years or more.
Q. Why would someone want to stretch the credit card debt negotiation process out longer?
A. In order to get more time to get debt settlement funds accumulated. For many people the only options to get out of debt are four-year settlement times or bankruptcy.
Q. Who do I pay to get out of my credit card debt and when do I pay it?
A. This varies with each debt management company. All credit card debt reduction plans will provide both for payment to the creditors and payment to the debt settlement firm. Payment to the debt relief firm can be on a flat fee basis calculated as a percentage of the total debt or a percentage based on the money saved through debt settlements. Payment of these debt reduction fees can be paid up front, over time, or when debt settlements are reached. Money to pay the creditors can be kept by the debtor until it may be needed or held in escrow by the debt negotiation firm. In many cases these debt settlement funds build up by the debtors adding to them each month.
Q. Who decides which debts to settle first?
A. While the debtor and debt settlement firm work on this together the decision frequently ends up being decided by the creditor who seems to be closest to starting litigation to collect their debt. Remember that good debt relief firms do quite a bit of this type of settlement, so they usually know in advance which of your particular creditors might get aggressive and when.
Q. What happens when credit card debt reduction not settle an account?
A. This almost never happens. Sometimes the credit card debt reduction firm will put an account off to settle it in the future if they think more time or a change in account status will produce a better debt settlement. Sometimes the credit card debt accounts settle higher than the projected range, but they almost always settle.
Q. Can I still file a bankruptcy if I try the debt settlement and it does not work?
A. Yes, but the money you will have spent on the credit card debt settlements prior to you filing the bankruptcy will be gone forever. This illustrates why you should try to make a master plan to pay off your credit card debt you can follow all the way through and stick to it until you complete it. What if the creditors and debt collectors keep calling me even after I have told them to stop?
Q. They may become liable for damages under the Fair Debt Collection Act. After I pay the negotiated debt settlement amount can the creditors still chase me for the balance of the credit card debt later?
A. No, that is what a credit card debt settlement is all about it represents full satisfaction of the debt, but having your paperwork set up properly so that you get the debt relief you expected shows another reason to have a professional debt relief company do the negotiation.