The short answer: Credit card companies and the debt buyers who purchase their accounts do settle for less than the balance, usually once an account is several months behind or charged off. Most of our clients pay around 60 cents on the dollar on the cards they settle. Get every settlement in writing before you pay, don't sign anything that admits an old debt, and if you are sued, answer before your deadline.
Why credit card debt is so often settled
A credit card is unsecured debt. If you stop paying, the bank has nothing to repossess. Its only tools are calls, letters, your credit report, and a lawsuit, and a lawsuit costs it money with no promise of collecting.
That is the whole reason settlement works. For many accounts, a certain partial payment today is worth more to the creditor than an uncertain full one later.
When card companies are most willing to deal
Early in a delinquency, the original bank may offer a hardship plan: a lower rate or payment for a few months. Real discounts on the balance are uncommon at this stage.
Around charge-off, usually after about six months without payment, the bank writes the account off as a loss. Settlement offers tend to improve here, because the bank is deciding whether to sue, hand it to a collection agency, or sell it.
After a sale to a debt buyer, the account belongs to a company that bought it for a fraction of the balance. Debt buyers negotiate, but they also sue, and their records are often incomplete. If the account is older than four years, Texas bars a debt buyer from suing on it at all. See our guide to the Texas statute of limitations on debt.
What results are realistic
In our experience, most clients end up paying about 60 cents on the dollar on the credit cards they settle, roughly a 40% discount, before fees. Be skeptical of anyone who promises a fixed percentage before they have seen your accounts.
What moves the number:
- who owns the account now (the bank, a collection agency, or a debt buyer)
- how old the debt is
- whether you can offer a lump sum rather than installments
- whether a lawsuit has already been filed
Sometimes the discount is much bigger. We once settled a charged-off card balance of more than $94,000 for about $14,000 while a collection law firm was handling it. That was an unusual result. Every account is different.
Get the settlement in writing before you pay
This is the step that protects everything else. Before a single dollar goes out, you want a letter from the creditor that states:
- the creditor and the account number
- the settlement amount and the date it is due
- that payment satisfies the account in full
- how the account will be reported to the credit bureaus
A phone agreement is not enough. Without a written settlement, a creditor can treat your payment as a partial payment and keep collecting the rest, or sell the "remaining balance" to someone else.
Mistakes we see when people negotiate alone
- Paying before the agreement is in writing.
- Signing something that admits an old debt. In Texas, a signed written acknowledgment can revive a debt that was past the four-year deadline to sue. Read every "settlement offer" form before signing it.
- Ignoring a lawsuit while negotiating. Talks with a collector do not pause a court deadline.
- Leaving your paycheck at the bank you owe. A bank can often take money from your own checking account to cover a card debt you owe that bank, without a court order.
- Settling one card and running out of money for the rest. The order matters, and the most dangerous creditor is not always the biggest balance.
If the credit card company sues you
Card lawsuits are common, and they are winnable or settleable more often than people think, but only if you respond. In justice court you generally have 14 days after you are served to file an answer; in county or district court, until 10:00 a.m. on the Monday after 20 days. Miss it, and the creditor can get a default judgment and go after your bank account.
An answer forces the creditor to prove the debt and that it owns the account, preserves defenses like the statute of limitations, and often opens the door to a better settlement. Our creditor defense page explains how we handle these cases.
Taxes on forgiven credit card debt
If a card company forgives $600 or more, expect a Form 1099-C. The forgiven amount can be taxable income, but if your debts exceeded your assets right before the settlement, the insolvency exclusion can wipe out some or all of the tax. It has to be claimed on your return. See tax consequences of debt settlement.
When bankruptcy is the better answer
Settlement usually takes two to three years and does not stop lawsuits. If you owe more than you could realistically save toward in that time, or creditors are already in court or freezing your bank account, Chapter 7 can discharge most credit card debt in a matter of months. Our comparison of debt settlement vs bankruptcy in Texas lays out the trade-offs.
For the full picture of how a settlement plan runs from start to finish, see our complete debt settlement guide. If you have a lawsuit, a final notice, or a settlement offer you are not sure about, call us at (469) 607-8552 before you sign or pay anything.