Credit Card Debt Settlement: Pros & Cons, Process

Rahul Kamat (fictitious name) works as an investment banker in a big multinational company. He was offered this job during the campus interview held during his MBA some years back. He had taken a home loan and was regularly paying EMI and did not miss paying a single EMI. Looking at his good loan repayment history, his bank also offered him a credit card with a very good credit limit and this was his first credit card and he did full justice with the card as well i.e. always paid full monthly bill and on time and used it cautiously.

However, immediately after joining this new job he went on to a foreign trip with his two best friends. And instead of carrying cash overseas, he preferred carrying credit card for major expenses. His decision was correct considering the security aspect and ease of payment. Since his friends were freshers and join their first job after 6 months, all the expenses were borne by Rahul. They had mutual trust and his friends had decided to refund the money to Rahul after receiving their first salary.

However tragedy struck Rahul few days after he resumed office and he was laid off due to poor performance of the company. But at the same time credit card bill went over the roof and the total expenses were above Rs. 5, 00, 000. As Rahul did not have any other option during such a financial hard time to pay such a big debt and neither his friends could contribute at this point of time, he was suggested to opt for credit card debt settlement.

So what does settling a credit card debt mean?

It is a process in which negotiation is done between card issuer and card holders/debt settlement agency (on behalf of card owner) to pay only a small part of the total due amount. So in case of Rahul; card settlement was approved (thanks to his good credit history) and only the amount of Rs. 4, 00,000 was to be paid to the issuer which was possible for him considering the fact that he had home loan EMI to pay. This means that Rahul will have to pay only the settled amount and that too in parts. The amount varies on a case to case basis.

But not everyone is as lucky as Rahul to get the settlement approved. This is because issuers/agency takes into consideration many factors before the approval such as reason for settlement, previous card payment history, defaulted loan etc.

But is credit card debt settlement good solution?

It is recommended only for individuals with no other option to make the payment like Rahul. However, if you can make the payment by taking help from your friends/relatives or through any other source then you should avoid taking debt settlement approach. This is because even though your debt amount is reduced your credit card report will show “settlement”. So for CIBIL, you do not have enough money to make debt payments and for loan/card issuers such individuals are considered risky borrower and they are often denied any type of loan/credit card. Read tips on getting credit card when your credit score is bad and improving the score.

Advice for Rahul once he gets job:

He should approach the card issuer and make the payment for the remaining amount. Small interest will be levied and this fine because after making payment, the CIBIL report will have a status of “Payment Done Fully”. This way you can improve your CIBIL score and you become eligible to get any type of loan (home, auto, personal etc.) or credit card in the future. Check out how to get credit report from CIBIL.

Debt settlement process:

There are two ways to reduce the debt:

  1. Hire a debt settlement agency that will negotiate with the card issuing bank on your behalf in return of processing fees and other charges.
  2. Do it yourself: If you trust yourself that negotiation will be manageable, then approach the bank directly as it is cost effective as you do not have to pay any fee and most importantly only you can best explain your financial condition to the issuer, no one else can.

Forgiving some part of the debt is one option used by the lenders because if an individual or a company goes bankrupt then the lender is on risk of losing big amount. So they take a route of debt settlement which is financially less painful for them.

So anyone applying for a debt settlement should consider all pros and cons before going ahead.

1 Comment
  • Pamela R. Moore

    Thanks for sharing. I really appreciate it that you shared with us such informative post, great tips and very easy to understand.

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