Settling with credit card companies for less than 20%

[Zac]

A personal account at another (small to midsize regional) bank that had a small balance of about 5K on it agreed to 20%.  They initially sent letters offering to settle at 50% and then went down to 45% and 30% on the phone before finally agreeing to 20%

Keep in mind that any account you settle will likely be reported as "settled" on your credit report and the bank may also file a 1099 reporting the forgiven debt as income.  You can file an IRS 982 declaring that you were insolvent at the time the debt was written off and not have the forgiven debt treated as taxable income. 

[heathenmom]

Shut. Up.  That is AWESOME!!!  Good for you!

[bust.a.head]

blah, 20% is a blah blub blah.

blah bla blah blah we blubba?

[heathenmom]

Not 20% interest.  The cc company is settling for 20% of the balance owed.

[EWHM]

Any way a charitable organization could buy somebody else's debt for 20-50 cents on the dollar (e.g., a church or coop buying some of its members' or wards' debts)?

[Zac]

Any way a charitable organization could buy somebody else's debt for 20-50 cents on the dollar (e.g., a church or coop buying some of its members' or wards' debts)?

That's an interesting idea.  I can imagine it could have a lot of potential in the current economic climate.  Imagine a church or coop buying the debt at deep discount (as the collection agencies do) and then leaving it in limbo after being reimbursed for costs.  The debtor repays the coop for their costs, but the coop does not make any further efforts to collect and also does not report the debt forgiven.  That way, the debt is settled for a small fraction of the balance presumably without tax liability. 

[EWHM]

Any way a charitable organization could buy somebody else's debt for 20-50 cents on the dollar (e.g., a church or coop buying some of its members' or wards' debts)?

That's an interesting idea.  I can imagine it could have a lot of potential in the current economic climate.  Imagine a church or coop buying the debt at deep discount (as the collection agencies do) and then leaving it in limbo after being reimbursed for costs.  The debtor repays the coop for their costs, but the coop does not make any further efforts to collect and also does not report the debt forgiven.  That way, the debt is settled for a small fraction of the balance presumably without tax liability. 

Yes, you get it.  The coop could forgive just enough of the debt each year to not trigger large amounts of tax liability for the member so that it eventually gets retired.  And, of course any year that there's an deal on forgiven debt not carrying tax liability would be jumped on with both feet.

[perdition79]

Those with no assets and all unsecured debt can still settle at 0%, right? 

[Zac]

Those with no assets and all unsecured debt can still settle at 0%, right? 

Yes, it's called bankruptcy.  But, most states allow a debtor to keep quite a bit even in chapter 7.  50K of home equity in california for singles (125K for over 65 or disabled or 55+ with <15K/year income) among other things.  Some states such as Florida and Texas offer a nearly unlimited homestead exemption so creditors (other than the mortgage company) are barred from going after a primary residence regardless of the equity.   

If you're one of those making near minimum wage with no assets, you have my sympathy. 

[bust.a.head]

[blub blubba=blabba blah=blub=blub.blabba#blabba blah=blabba]
bla 20% blabba.  bla cc blabber is blabba bla 20% of bla blabber blah.
[/blub]
 
Oh. blah. blah to blah it.  

bla blabber blub blubba, 20% blabba is blah blabba!  

[badgoat]

Your credit score will tank. For many that is just fine, but for many others (like me) it's not possible. My two credit cards already effed me over by dropping my available balance to $100 more than I owed at the time, giving me an instant 99% owe-to-limit ratio, making me appear to be a very risky person and my credit rating has since tanked. But that is very repairable, and all it takes is a short amount of time and a better debt ratio. When you settle with credit card companies, your credit score remains hosed for years. It's been four years since I went through a debt settlement (not bankruptcy) and the two creditors are still on my credit report. They show as paid, though it is still a detractor.

Oh,  friend declared bankruptcy 14 years ago.. It took until year 12 before they finally removed it from his credit report. Took dozens of letters and phone calls though.

[badgoat]

There I went right off on a tangent and forgot to come back to my main point.

Many people are in homes or in areas or with sufficient "stuff" to be happy with whatever number a creditor wants to assign. There are others (like me) who may need to move or buy things while still having one foot in the old system and rely on these numbers. As a townhouse dweller I clearly need a more spacious place to hunker down, and I don't have nearly as much 'stuff' as I'd like to make this hunkering possible. Even renting somewhere is impossible with tanked credit at this point. Those evil little numbers are checked for everything, even to get a new job.

[Zac]

There is no question settling with a credit card company for less than you owe will result in the account being reported as "settled" on your credit report.  I would presume this is derogatory, but I don't know the exact impact on fico score.  If anyone knows about this, please chime in.

I have been told by knowledgeable people in the industry that the effect of having settled accounts is substantially less than if the accounts were charged off and sent to a collection agency.

Having a low fico score is likely to cause problems if you have or want a job in law enforcement or that requires a government security clearance.  It's possible settling will depress your fico score for up to 7 years.

It is interesting that some of my other credit accounts that I've continued to pay in full each month have remained unaffected despite most of my other unsecured credit accounts going unpaid for up to 7 months.  One credit card account did greatly reduce the credit limit which is somewhat inconvenient, but not surprising under the circumstances.  That creditor said they would reassess the situation in a few months and hopefully bump my credit limit back up. 

[badgoat]

I'd recently applied for a job in the IT field as a consultant and was asked for my permission to allow them to get a comprehensive look at my credit rating.  I've worked hard to get my credit score back up after I had to settle years ago.. I've never been late, always paid more than the minimum, and I was rewarded by the credit card companies making me appear to be a serious risk, which others would no longer touch. It's a form of slavery, I believe. I'm not allowed to search for my best credit option, I am forced to remain with who I have now because they have used the very system to remove my options.

[cz]

20% now, or nothing 6mo's from now when (if they aren't already) they're unemployed and filing bankruptcy...   

or to spoof the Capital One commercials:
"20% of 10K ($2K) now, or 0% (nothing) later - which would you rather have in your wallet?"