I covered in detail how and why banks settle debt with you, in the prior article in this series. Now, lets take a deep dive into a debt settlement plan, and look at who you could be settling with. You need to know that not all debts are created equal, and that negotiating debt has typically been a strategy best applied to credit cards.
NOTE: This post is part of our Debt Settlement Guide. If you’ve missed any of the previous content, or would like to start at the beginning, please see the links at the bottom of this page.
Your settlement plan can include other types of debt besides credit cards, and I do cover some of that in this article, but I would encourage you to talk over more advanced strategies using the comments at the bottom of this page.
Here are some examples of types of accounts where settling for less than what you owe is most common:
- Bank-issued credit card
- Store credit card
- Gas card
- Signature loan
- Deficiency balances after repossession
- Third party collection accounts
A basic rule of thumb when it comes to settling debt is to focus only on your unsecured debts. There are opportunities to settle a HELOC, or other secured loans, but that is much more situational.
Settling With Your Credit Union May Not Be a Good Idea
Local and Regional Credit Unions are a good example of accounts you may be advised to keep from negotiating settlements with. Smaller credit unions tend to have credit card default and collection policies that deal with members at a very local level. What this can lead to is the credit union only outsourcing collection activity to local attorneys. The obvious implication here is that the risk of being sued are increased, and often sooner than you would be at risk from national credit card banks.
Smaller credit unions also have a reputation of being really tight with the percentage of savings they will offer credit card account holders. Over the years of working with people to settle their credit union debt, i have estimated settlement targets for credit union cards at 70 and 80 percent. Depending on the situation, this type of settlement can still make sense for you, but more often than not, crunching the numbers shows using a hybrid or creative debt consolidation approach to debts with small credit unions makes better sense.
Another concern with credit union cards, when you are not making payments, is how different types of loans have cross collateral elements. If you have insurance products through your credit union, a personal loan, or a car loan, missing payments on your credit card debts with that same credit union can impair other accounts and services at the same bank.
Larger credit unions that operate at a more national level, such as USAA and Navy Federal, do settle like national banks, and at rates of savings that will makes sense to include in your debt settlement plan.
Some Banks are Tougher When Settling Debt
There is an ebb and flow to how banks treat defaulted credit card debts. Each bank sets their own policies for how they manage accounts that become late.
You will see many similarities from one bank to the next, but there can be big differences too. Here are a few things that can change from one credit card to the next:
- How each bank’s internal collections departments handle lower payment offers, and how and when to offer account holders settlements.
- How soon each of your bank’s will assign accounts out to a debt collector, and who those collection agencies are.
- How soon, what types and amounts, or even if, they will sell charged-off accounts to debt buyers.
- How and when accounts are selected for placement with debt collection attorneys with authorization to sue you in order to collect.
After helping people navigate their inability to stay current with credit card bills for many years, I can attest to creditor changes being constant. All of the larger credit card issuers make adjustments to some, or all of the above bullet items. And while this can often lead to frustrations for you, you can still roll with each change and be prepared for any outcome.
Some credit card lenders do not sell debt to junk debt buyers. American Express is the best example of a credit card where the bank holds onto collection accounts, only assigning out to debt collectors and collection attorneys, like Zwicker and Associates, and not selling the legal rights.
Discover has sold debts, but has not been doing so recently.
Bank of America and Citibank all sell debts at different stages, but do not necessarily sell all of their delinquent accounts.
Chase credit cards have traditionally been sold off to debt buyers, but they stopped doing that in 2013. Chase could start up debt sales again in the near future.
All of the major credit card banks will settle for different amounts, at different times, and with changing floors for what is the lowest offer they will accept.
The fact that so much can change when it comes to settling credit card debts can make it difficult to find credible and real time information about settling… so be careful! What you read into an article from 2009 may contain information that is no longer helpful because the reality of settling with your bank has changed since then. Even information posted last year may be incorrect today.
The list of more difficult-to-settle credit cards, at the time this article is being re-purposed for the CRN settlement program guide, is very small. It includes the above-mentioned smaller credit unions and American Express. But Capital One and Discover do make it back on the list from time to time.
One of the main benefits offered to you from this website will be the foundation and understanding of how settling credit card debts at all stages of collection works. A HUGE additional benefit is the ability to interact in the comments and get real time intelligence on what is happening with your creditors.
You can also call in to consult with me, Michael Bovee, for free at 800-939-8357 ext 2.
Leave Small Credit Cards Out of Your Plan
This fact requires some explanation. With the debt settlement approach, you cannot generally settle a debt until you have missed several monthly payments. You will often not realize the best savings when settling until you are in advanced stages of delinquency. You know that an account will generally be close to, or already charged-off, when you negotiate and pay the settlements. But small-balance debts that are not being paid are increasing due to late payment penalties, default interest rate increases (if you were not already paying the higher rates), and potential over limit fees.
If you have a $700.00 balance that you missed paying last month and must wait until month 5 of consecutive nonpayment to approach settlement, you are now negotiating on an increased balance that totals $1000.00.
Smaller balance accounts are often not going to see the best savings percentages because the thinking from a collection point of view will be “okay, we can reduce the balance and settle for less. We will not accept $350.00. The lowest we can accept from you will be $500.00.”
You see, they are thinking (and often rightfully); “who can’t come up with an extra $100.00 or $200.00 dollars.” I know I would be thinking that if I was owed the money, and willing to take less than what was owed. Especially if my internal statistics show I have success getting paid an extra 100 to 200 dollars on the smaller accounts.
If you include a low balance account in your plan – you are going to be limited in the savings you achieve, especially if you don’t settle it quickly. In some cases, you may end up settling for the amount you owed in the first place. Watch this video where I discuss accounts to include in, and types of accounts to keep out of, your debt settlement plan:
Keeping smaller balance accounts out of your program, and either paying them off in full and retiring the card to the sock drawer until your larger balance accounts are settled, or continuing minimum payments while you address other accounts, can be good planning. This may even help your credit bounce back quicker than had you included the account in your plan. You could get more value this way (more on this below), than you would have from the potentially limited $200.00 settlement savings outlined above.
If you have small balance accounts that are already charged-off (more than 6 months past due), you should look to settle them as the damage to your credit, and the balance increases, have already occurred and typically cannot be undone. These smaller balances will either be targeted as early priority for settlement, or given less priority depending on other accounts, those balances, who the creditors are, and the stage of delinquency the accounts are in. Prioritizing accounts that are more likely to get aggressive with collection efforts will often be better for settling sooner than others.
Balance Transfers, Cash Advances and Large Purchases
As a general rule, accounts that you have made recent balance transfers to are not accounts that should be prioritized for settlement, when the amount transferred to the card makes up more than 20% of the total owed. Here are three creditor policies to consider when negotiating accounts that have recent balance transfer activity:
- Not approving any settlement at all.
- Offering a reduction that may be twice as high as would have been the case were there no balance transfers.
- Approving settlements when balance transfers occurred at a minimum of more than 12 months before you stopped payments (some creditors have been known to refuse their best settlement offers using a 24 month balance transfer policy).
Similarly, if the account has had a large volume recent purchase activity exceeding that credits set percentage of the current total balance, creditors will often dig their heels in at settlement time. By digging in I mean not allowing settlement of any kind, or only offering balance reductions that are not what would have been on the table had there been certain recent purchase behavior. This policy, if applicable, can often be averted by waiting to settle with an outside third party collection agency, or a debt buyer.
Also know that some credit card bank policies do not allow settlement if the account was opened too recently. The timeline for settlement on established accounts can be set at a year to three. But as I mentioned earlier… things change. Once upon a time, a couple of the larger banks would just not settle accounts for less than 60 and 70% if the account was newer than 5 years! That was many years ago, but that type of policy returning with some banks is not a stretch.
There are instances where your personal hardship can qualify for exceptions to some of the tough creditor policies outlined above. If you recently suffered a major health issue and will not be able to return to work soon (or at all), is a good example of what may help overcome creditor objections to offering the lowest available settlement, even when you have triggered a red flag.
Be sure to post details about any account you have concerns with in the comments below.
Keeping Credit Cards Open
Settling credit card debt is often described as an “all or nothing” way to get relief from overwhelming debt. Many debt settlement companies advise you enroll all of your credit cards into their debt settlement program. Even credit counseling agencies offering debt management repayment plans will often require all of your unsecured credit cards to be enrolled. And there are some good arguments for taking the all or nothing approach.
With debt settlement, all or nothing can bounce back and hit you in the pocket, if you try to settle the wrong accounts. But are there concerns with keeping some accounts open while still settling other debts?
There are benefits to keeping some accounts open. Not the least of which could be a later boost to your credit score.
Your credit score is factored using many data points. Having open-ended revolving consumer debt (credit cards), is a healthy part of your credit report and credit rating. If you’re in a position to need to settle all of your credit cards, you’re going to lose the benefit of having open and active revolving accounts in your credit profile. This is not a big deal, because you can acquire new credit cards after the debt settlement “dust” settles. But having one or two accounts you can pick up and begin using responsibly would mean:
- The credit damage from settling debt may not be as severe for you.
- You may find your credit score improves more rapidly after all of your other debts are settled.
- You may not have to look for alternative plastic, like secured credit cards, as a credit rebuilding step later on.
If you have the option to keep some accounts open while settling other cards, but are wondering which ones to keep, post in the comments below for feedback.
Warnings About Open Credit Cards When Settling Other Debts
Okay. There are benefits to keeping accounts open if you have to settle other cards. But I need to talk to you about some drawbacks. And these are not warnings to take lightly. The amount you can save from negotiating a settlement can be impaired.
If you elect to hold an account out of your debt settlement program, you will generally want to choose one that has a low-to-no balance. This makes sense because you’re likely trying to settle your larger balances. But there are concerns when you keep other credit cards open.
- If you have more than one credit card from the same bank, and are trying to settle the larger balance one, while thinking you will keep the other account with a low, or no balance on it, think again. Your creditor may close the account that you’re not using because they see that you are struggling to pay the other account with the higher balance.
- If you’re using credit cards while settling accounts with other banks, that fact can be seen by a debt collector who is paying attention, and taking a hard look at your recent credit report. Your credit card trade lines are updated to show recent balance changes, recent payments etc. A debt collector’s interpretation of what they see in your credit report could impact the settlements you seek on other accounts.
- The credit cards you are trying to keep open could have the credit limits slashed, or closed, by the creditor, even if you do not owe anything on the account. This is because your credit card banks often perform periodic reviews of your credit report. If they see that you’re not paying other credit card bills, they view you as an increased risk of defaulting on payments to them. Banks will often manage that risk by closing accounts, or dropping your available credit limit to what you owe on the account.
Are there legitimate reasons to keep a credit card out of your settlement plan that you continue to make timely payments on? Yes, and there are legitimate talking points you can use later when negotiating other debts. One of the ones I have had to repeat over the years when I am working a file is “My client is a small business owner. That account is for business purposes only and is paid from the business account”. Another example would be if you had a family member use the account because they needed to. And they are the one that is paying the account each month.
Keeping some of your credit cards open and out of your debt settlement plan is doable, but identifying which ones to keep is often limited to the ones you have little to no balance on. Keep open credit cards in a sock drawer (maybe someplace safer), and do not use them again until you have settled your other debts.
For you DIY-ers, if you have accounts with large balances that you continue to pay, while others go unpaid because you are going to be settling them, have your talking points about the open accounts at the ready. It’s highly likely debt collectors will bring it up.
Please continue with Debt Settlement is Like Running in a Race in the next section of the CRN Settlement Guide.
All readers are welcome to post questions in the comments below for feedback, or to join the discussion with your own specific tips and preferences for choosing accounts that you keep. If you have an oddball situation that you want to talk to me about you can reach me at 800-939-8357, press option 2, or submit a consult request form.
This Debt Settlement Guide includes:
An Expert Guide to Credit Card Debt Settlement
How and Why Banks Settle Credit Card Debt with You
Types of Accounts to Include in Your Debt Settlement Plan (you are here)
Why Settling Credit Card Debt is Like a Race
How to Settle Credit Card Debt Quickly
How to Talk to a Debt Collector
How to Negotiate Credit Card Debt Successfully Yourself
7 Largest Credit Card Banks and How They Settle Debt
Get Debt Settlement Letters and Agreements from Collectors
Paying Debt Collectors After You Negotiated a Settlement