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I have a considerable amount of CC debt spread over three CCs. As my home refinance is in the process, it looks like I will soon have the cash to pay them all off.

However, I have been receiving phone calls from companies offering a credit card settlement at about 50% of my balance and they say it involves stopping payments and then offering the CC company a lump sum payoff of the reduced balance in exchange for writing off the rest. So I am wondering if it is smart (not ethical, let's keep the ethics out of the equation) to pay it off if I can get away with paying only a half after a few months of non-payment. Of course, my credit score would suffer but the refinance deal looks so sweet (cash) that it doesn't look like I'm gonna be needing credit any time soon. So sacrificing my credit score temporarily would not be so bad.

I would like to avoid using the settlement agency and do it myself for obvious reasons of not paying them the fee. So I was just going to stop making payments to show them I mean business and then call them a few months later to offer cash for 50% of the balance. If they don't accept, I continue non-payments. The settlement agency's strategy, in short.

I was wondering if this approach can be dangerous or illegal and whether they can sue me. If not, are there usual step one can take to conduct this process alone without a fee-charging settlement agency?

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Almost by definition, "credit card settlement" companies who are cold-calling you are predatory businesses which are raking a payment out of the pockets of those who can afford it least. Treat anything they offer with extreme skepticism. If it sounds too good to be true, it IS too good to be true. –  keshlam Jul 29 '14 at 19:27
@MarkMonforti what were you doing? Even today $60/hour part time jobs are uncommon unless you've got specialized skills. –  Dan Neely Jul 30 '14 at 14:35
@Dan Neely that was my bad it was $60 a week. $240 a month. –  Mark Monforti Jul 31 '14 at 13:50

3 Answers 3

up vote 11 down vote accepted

This would be on your credit for ~8 years. If it goes according to your plan, it will take 6 months to a year to do the settlement by getting behind enough to let it go to collections and then settling. The write-off will then be on your credit record for 7 years before it "falls off".

Your cash out refinance would have to cover you for at least the next 8 years to be valuable.

And you have a lot of assumptions to get there:

  1. The lender will send your bill to collections.
  2. The collection agency will accept 50% return on a debt recently sent to collections.
  3. You don't need credit between now and 7 years after paying off the delinquent credit.
  4. You don't have a current line of credit (HELOC or other credit card) that will be closed based on an adverse credit report.
  5. The lender doesn't decide to seek a judgement against you and garnish wages directly for the loan amount + collection fees + interest which could be greater than 100% of the debt.
  6. The lender is willing to settle with you for 50% when you have > 50% sitting in bank accounts.
  7. You won't need to move in the next 8 years and won't need a new mortgage.

In short, there's one way (or only a few ways) this works out well in your favor. There are many ways that this has the chance to hurt you. I don't like "investments" with those kind of odds.

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At no point is it ever a good idea to "stop making payments to show them [you] mean business". When you signed up for the credit card account, you agreed to pay what you charged, and any applicable interested accrued on the accounts. You are legally responsible for that debt, and you can be sued, if they are so inclined.

Many times, settlement agencies are employed because a risk assessment operator (or whatever they're called at your cc company) calculated that they are currently financially better off settling for a reduced balance than attempting to chase you for the full amount. As soon as the terms of your refinance hits your credit history, that changes.

To reiterate and make it clear: This is a very dangerous approach to breaking credit card debt, and I would not advise that anybody proceed with it.

EDIT: If you offer 50% of the balance in a lump sum payment, they decline, and you continue with non-payment, they have reason to believe that you are financially capable of making payments, and are much more likely to seek legal action.

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Another note: If you do reach a settlement, any amount you settled out of is charged to you as imputed income (1099) for the tax year, and you are liable for the tax burden associated with it. –  Noah Jul 29 '14 at 19:04

This strategy will have long lasting effects since negative items can persist for many years, making financing a home difficult, the primary source of household credit.

It is also very risky. You can play hard, but then the creditor may choose you to be the one that they make an example out of by suing you for a judgement that allows them to empty your accounts and garnish your wages.

If you have no record of late payments, or they are old and/or few, your credit score will quickly shoot up if you pay down to 10% of the balance, keep the cards, and maintain that balance rate.

This strategy will have them begging you to take on more credit with offers of lower interest rates. The less credit you take on, the more they'll throw at you, and when it comes time to purchase a home, more home can be bought because your interest rates will be lower.

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