How to settle your credit card bills for less

Americans collectively owe a lot of money to credit card companies. For many, those amounts may seem impossibly large, especially when card companies raise interest rates and add all sorts of fees and penalties to sour your bill even further. Before you throw in the towel and consider bankruptcy, though, here's a little-known secret that might help get you out from under that "impossible" debt: You can negotiate with credit card companies and bill collectors to pay or "settle" your debt for less than what you owe.

Don't look so skeptical! Yes, this can be done, and yes, it's legal. Author Ken Golde even wrote a book detailing how to do it after he found himself in debt to the tune of more than $200,000 after his business partner passed away suddenly. To help you out, we got Golde, along with some other debt-management experts, to offer their best tips and advice for getting rid of some of your debt.

First of all, the process of negotiating to settle your debt isn't a silver bullet nor is it a quick solution. Golde spent almost two years haggling with creditors, some of them repeatedly, before he was able to wipe out much of his debt. One negative side effect, is that it will lower your credit score, since anyone who pulls your FICO report will see that you didn't pay the full amount originally owed. Golde acknowledges the hit to his score but says it was a more palatable solution for him than bankruptcy, which lingers on your record for a full 10 years.

Before you talk to the collection agents, get your ducks in a row and be able to tell your story succinctly, advises Gail Cunningham, a spokesperson at the National Foundation for Credit Counseling. Draw up a list of all your expenses, and have it on hand for reference. If you're not paying your credit cards because all your money is going toward your mortgage, explain that. If you've lost your job or are about to lose your job, explain that, too. You need to account for your money and where it's going without being long-winded, Cunningham advises.

And while we're sure this goes without saying, don't lie. "They're going to know your financial situation," says Cunningham. Credit card companies and the collection agencies they sell their uncollected debts to have access to a lot of information about your income, your expenses and the details of your finances.

So how much should you settle for? That's the $64,000 question, and the answer varies tremendously from person to person. There are a few ground rules, though.

First, never take the first settlement the agent offers, says Ed Mierzwinski, a consumer program director at the U.S. Public Interest Research Group. Like any other type of bargaining, the collectors expect to have to go back and forth with you, so don't jump on the first number they throw out. "Don't forget -- you're negotiating, not rolling over," says Mierzwinski. "The first offer, or even the second or third, are likely to be sucker bets." On the other hand, don't offer mere pennies on the dollar -- say, 10% or less. This makes it sound as if you're not serious about negotiating.

Golde says he settled the majority of his debts for between 30% and 35% of what he owed, although your mileage may vary, so to speak. And it's important to commit only to what you can repay. "Never promise what you can't fulfill," warns Cunningham. If you agree to a settlement with a creditor and then fail to pay that, you're unlikely to get a second chance.

One final piece of advice: Keep a paper trail of everything you discussed and agreed to, all our experts told WalletPop. When you do settle, hang onto whatever you receive saying that your debt has been paid off. It's not unheard of for bill collectors to sell the "settled" balance to yet another collection company, who may call you and try to collect again. If you don't have the paperwork showing that your settlement with the original collector is legitimate, you'll be stuck starting all over again -- but you'll be out the money you paid in the first place.

Finally, keep in mind that you'll need to develop a thick skin and spend a lot of time on the phone. While they can't harass you, bill collectors are paid to get money from you, not be nice to you. That said, everyone we interviewed said being courteous and professional goes a long way. So even if they're not playing nice, you should.
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