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Negotiating down card debt and your credit score

You've successfully whittled down what you owe, but now what?

By

To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets.
Ask Sally a question, or read her previous answers in the To Her Credit archive
Question for the CreditCards.com expert

Dear To Her Credit,
I am helping my sister-in-law settle her credit card debt. She is in a very tight financial situation -- it is either settle her debt or not pay at all.

She is able to borrow some money to pay off her debt, and I have negotiated the card down to 25 percent of the original balance. Now my question is: Can I request to have the item deleted from her credit report? The card is Chase. They did not charge it off, but they sent it to their collection company. I want to do what is best for my sister. What is in their power?

Also, every month they add fees. Can I ask that they remove the fees from the last original balance that she charged?

 Thank you. -- Joanna

Answer for the CreditCards.com expert

Dear Joanna,
Good negotiators know when to stop negotiating and take a good offer. That's the case here. If your sister-in-law can settle her debt for 25 percent of the balance, she should.

Ethan Ewing, president of Bills.com, agrees. "That's definitely a favorable settlement," he says. "You don't hear about those very often."

In fact, to get such a favorable offer, you must have convinced the credit card company that your sister-in-law almost certainly cannot pay more. Credit card companies settle debts when, as in your sister-in-law's case, it's in their best interest to try to get something rather than nothing. Ewing says, "It must be an old debt or the borrower has a significant issue or inability to pay." Contrary to what some radio and TV ads would have you believe, people can't automatically get out of paying credit card debts just because they're in over their heads. Being out of work, having serious medical problems, marital issues or anything that's going to affect your ability to make payments can influence a creditor's decision on whether to settle.

Go ahead and ask the credit card company if it is willing to remove the settlement and other negative information from the credit file if she pays the 25 percent. Be aware that you are asking the credit card company to withhold truthful information, however, which it may not be willing to do. If you don't ask, you can be sure the settlement and any late payments will be on her credit record -- for years to come.

You've already negotiated down the fees they add every month. "That would be part of the settlement arrangement," says Ewing. "If she's negotiated 25 percent of the balance, that includes any fees, so she'll just be paying 25 percent of those fees." Be aware that there may be tax implications for the amount of the forgiven debt.

Now that you've helped your sister-in-law chop 75 percent off her credit card bill and someone is lending her money to pay the rest, I hope you can continue to help her until she is past this financial tight spot. It's best to avoid giving relatives cash if you can help it. Instead, you can:

  • Give moral support. Just being there, sharing a cup of coffee or being a phone call away can help.
  • Help her find a job if she needs one. You can spruce up her resume and cover letter, drive her to interviews or watch her kids while she looks.
  • Lend or give her things she needs to get back on her feet. Don't get carried away, but a business suit, the use of a car to get to interviews or your old laptop computer so she can brush up on technology skills can make a difference.
  • Share financial education resources. Even if her financial troubles are not her own doing (and usually we have to own up to at least contributing to them), everyone can learn more about money and how to avoid getting in such a jam next time. You might even consider going to a financial seminar together.

You're off to a great start helping your sister-in-law by negotiating her debt. Stay with her now as she takes control of her finances and her life.

See related: How debt settlement works, how it affects credit scores, Beware tax bite that follows debt settlement, Credit card video: The basics of debt settlement

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Published: February 5, 2010


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