This credit card Payment Plan works by being able to total up your credit card debts and the minimum monthly payments required to keep your accounts current.  For example, a debt of $25,000.00 and a total minimum payment of $750.00 on all credit cards.  For this payment plan to work, you need an additional 20% to be applied to your minimum payments.  This comes out to be an extra $150.00 per month you need to put towards your credit card debt.

Now put your credit cards in order with the lowest principle amount first and the highest last.  Make the minimum payments on all cards except the first card, which will get the minimum plus the extra 20% or $150.00 as shown in our sample.  Keep applying this accelerated payment to the first card until it is paid off.  Then apply the extra $150.00 to the second card and so on until all your cards have a zero balance.

Another way to work this plan is to list your cards by interest rates with the highest being attacked first and so on.  Our experience is to get some early successes and enjoy paying off a card then working on the next.  It is a great motivation to be able to remove one credit card and then two credit cards from your list.

For this approach to work, you must be confident that your budget can handle this extra 20% each and every month.  If making the minimums each month is difficult, then this plan is probably not for you.  However, if you think you can make it work by saving money in one area or increasing your income somehow, then this approach could be a great way to pay off all your debt in a more manageable time period without severe damage to your credit.

Note.  A recent ruling by the federal government encourages credit card companies to increase minimum payments up to 4% so that their creditors can pay off their debts faster.

In theory it is a good idea but if you were having a difficult time paying your minimums at 2 or 2.5% this ruling will make it even more difficult and lessen the chance that this payment plan can work for you.

First know exactly how much and to whom you owe money.  Get out your credit card statements and loan agreements and list the debts with amounts owed, interest rates, and current status.  Are you currently delinquent and if so, how delinquent, are you working with the original creditor or a collection company, and has any legal threats been made on the account.

With this information you want to attack your accounts as follows:

1-      Any account that has pending legal action .  Substantial settlements are still possible but you need to have a lump sum to negotiate a one time or very short payout plan.

2-      Accounts that are approaching the charge-off date with the original creditor, usually around the 180 day delinquency.  Your creditor will be most receptive to offers before they are forced to write off the account as a loss.

3-      If all things are equal regarding collection pressures pay off the smallest amounts first.  This way you may have enough set aside to settle more than one account.  Your credit looks better the more accounts you settled not necessarily the amount.

4-      After you have exhausted your initial set aside amount your accounts  will probably be with a collection agency.  Deal with the account that will give you the best offer when new set aside funds are accumulated.

Also, know that your creditors have invested millions to be able to track your credit and payments histories.  When speaking to them (if you must) do not divulge any information that might be false if they were to see your credit report.  For example, the creditor will know if you are paying your other creditors and not him.  He won’t  negotiate if he feels you are taking care of your other accounts at his expense.  He must think that you are on the verge of bankruptcy and his only hope to salvage any money from you is to negotiate a partial payment.  Your records will show how you are handling your debts.

What do they look for when determining if you are indeed close to bankruptcy?  First on how you are handling your payments with all your debt.  Are you dealing with a debilitating medical problem, are you out of work or show no probable future increases in pay, and finally do you have anything to lose in a bankruptcy such as a home or vehicle.

Remember they can check much of the information you provide them. They have access to your credit report, credit applications, Social Security Administration, public records, court records, etc.  If it’s in the public domain they have access to it.

What they don’t want to see when reviewing your credit history, and whether you are a good client to settle with.

1-      Recent activity on your card especially cash advances.  They don’t want to see you running up to credit limit and then declaring a hardship.

2-      You are current on all your accounts.  What incentive do they have if you show you can keep up with your minimum payments. They must be convinced that you might file bankruptcy and they will get nothing.

3-      You offer a low settlement amount and want an extended payment period.  Unless you can settle with a lump some or short payment of 2-3 months you probably can’t get better than a 60% offer.  Why?  They don’t trust that you can live up a longer-term agreement.  Plus, since they are accepting only a partial payment they will want their money ASAP and move on.

4-      They think they can sue you and recover money.  If they think you are pulling down a big salary and have assets (maybe hidden), they might think they can take you to court to recover their debt.  This is a gamble for them because it is so expensive and takes a lot of time, plus you could still file bankruptcy at the last minute and they would get nothing.

1)      Increase your income – work more hours, ask for overtime, or look for a part time job.  Every extra dollar you earn and apply to your set aside will be worth 2-3 dollars at settlement time.  How about your spouse or your teenager, this is a family crisis, ask everyone to pitch in.

2)      Adjust your withholding – Most people have too little deducted from their paychecks and have to wait for their tax filings to get this money back in the form of a refund.  In 2005, the average refund was $2,144.00 that is $178.00 a month, which could be added to your set aside fund.  A 6-month set aside would equal $1068.00 (or a settlement of a $2000.00 debt at a 50% agreement).

3)      Borrow from family or friends – It doesn’t hurt to ask, but once you’ve settled your debts for 40 or 50% of the totals you can concentrate on repaying them back at a fair interest return (more than the 4% they can earn in the bank).  Without the credit card debt, you can afford to pay them back at a reasonable time.  Make it a true business arrangement where both sides can prosper.

4)      Sell some stuff – Go online or have a garage sale.  Do you really need all the stuff that has accumulated over the years.  With the success of eBay and other online flea markets, millions of people are getting top dollar for items that have been stored in their basement or attics for years.  There is a market for everything, so take a realistic inventory of what you have accumulated and turn it into much needed cash.

5)      Borrow from your Whole Life Insurance – You can borrow on the cash value in your life insurance at a reasonable rate with long-term payback period.  However, your benefit will be reduced by the amount borrowed.

6)      Tap into your Stocks, Bonds, Mutual Funds or other Investments – You could do much better than your 10-12% return by paying off 50% of your debt.  Get your debt under control, stop those killer interest rates and fees, then start investing for your future.  Think of what your nest egg would look like if you invested your minimum monthly payments instead of the black hole of credit card payments.

7)      Borrowing from your 401k.  This should be your option of last resort, however, the rate of employees tapping into their retirement funds are growing.  According to the Investment Company Institute about 20% of workers have borrowed against their 401k with an average amount withdrawn at about $7,000.  Some things to consider:

1-      This $7000.  At a 7-8% interest rate could be worth $75 – 80,000 by retirement time.  So you’ve traded $75,000 for $7,000.  Was it worth it?

2-      If you lose your job you will have a short period of time to replace the money into your account or get taxed and penalized as a premature distribution.  If not paid back, you lose your tax exemption on this amount and the money will be treated as income and a substantial penalty assessed.  This could cost you thousands of dollars.

8)      Sell Assets – If you are truly serious about debt freedom you will need to look at the luxuries in your life and decide what you can part with.  The extra car, heirlooms, collections, even real estate.  Get debt free first, and then rebuild your wealth.  These are things and although nice to have, cannot replace your good health that could be jeopardized by your continued financial stress.

To recap! For these first 90 days, set up your savings account and make deposits. Then advise the creditors on a monthly basis with a phone call or letter.  Nothing important happens over this period.  No one you could talk to would have the ability to settle so don’t offer.  Remember the settlement process will not work until your account has aged at least 150 days and the credit card company is looking at charge offs.

Upon initial notice from these debt collectors you will be advised that the original creditor has assigned or sold the debt to them and that you have 30 days to question the validity of the debt in question.  Since these collectors are governed by the FDCPA you have the right to demand certain proofs from these agencies regarding the debt in question.  These rights are called Debt Validation and are covered by the FDCPA Section 809 (b).

These are the companies that purchase your debt as a last resort to collect your funds.  Their employees are less polished or professional and dealing with them can be unpleasant.  They are usually more aggressive with nasty letters and calls threatening legal action if the account is not paid.  These threats are mostly idle.  Remember they bought the $5000.00 debt for probably only $200.00 – $250.00.  Why would they waste money for a protracted legal fight when they could settle the account for $1500.00 (30%) and make a handsome profit.  Don’t be intimidated by their antics.  Control and time are on your side.

Negotiations are the same as with collection agencies.  Don’t contact them until you have the money available (only want lump sums), then call 7 business days prior to months end (quota time).  Start with a lower amount $1000.00 (20%), and if not successful wait another month and raise the offer slightly, if necessary, and keep following this strategy until they agree.  They should settle for well below 50%.  Remember, by this time this is considered “junk debt”.  The owner has only spent pennies on the dollar and they want to make a reasonable profit and move on.  You can get your best deals with these collectors.

Scenario #1 – You have more equity in your real estate than the unsecured debt you want to pay off.

Choice is Debt Consolidation secured by a Home Equity Loan provided, however, that the equity loan interest rate is at lest 25% less than the current average rate you now pay.

Scenario #2 - You have equity in your real estate that is greater than 50% of the unsecured debt to be paid off.

Choice is Optimum Solution (Combination of Debt Consolidation & Debt Settlement)

Scenario #3 - You have the ability to raise 50% of the unsecured debt to be paid

Choice is Optimum Solution (Combination of Debt Consolidation & Debt Settlement)

Scenario #4 – You can consistently pay 20% or more above the required minimum monthly payments.

Choice is Accelerated Payment Plan

Scenario #5 - You feel your cash flow problems are short term (6 –12 months), because your income will increase substantially in the next year or you will have a drastic reduction in your expenses, or you can consistently pay at least 3% of the unsecured debt each month, during this period.

Choice is Credit Counseling to reduce interest rates and extend payments.

Scenario #6 - – You can consistently make at least 2 ½% of the unsecured balance each month.

Choice is Debt Settlement – this amount goes into your set aside fund.

Scenario #7 - – You cannot pay the monthly minimums because your income is too erratic but may be able to accumulate 50% of the total unsecured debt by setting aside what payments you can save and possibly borrow the balance in a 24-36 month period.

Choice is Debt Settlement

Scenario #8 - If you are unable to raise significant funds or have no way of making even the monthly minimum payments.

Choice is Bankruptcy

We hope that the decision-making examples we just covered gave you some guidance on the right path to proceed for your financial future.

The best way to have your credit card company lower your interest rate is to simply ask for a reduction.  The company has no incentive whatsoever to voluntarily reduced your rate, so you must be proactive and make the call.

The conversation should go as follows:

Hello, my name is John Smith.  I feel that I am a good customer and I try very hard to be a responsible cardholder, however, I have recently received several offers in the mail from other credit card companies offering substantially lower APR’s.  I want you to lower the rate on my card, or I will have to cancel my card and switch companies.

That’s all there is to it.  If you have in fact been a reasonably good customer they will usually agree to your demand.  Remember, there is a lot of competition out there for your business, and it costs them a lot of money to acquire new customers.  So it is important for them to keep their good customers.

A survey in 2002 followed customers of all different credit backgrounds who asked for interest rate reductions and found that 56% were successful, some at substantial savings.

So be aggressive and make the request.  This lower interest rate combined with other debt reduction options will get you on the path to your goal of financial freedom much quicker.

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banks and credit unions, not the secondary processors like collection agencies or collection attorneys.  Now, we will go over what types of creditors are available and can they be settled using the debt settlement process.

1) Credit Cards:

A) Most cards are issued through banks.  (MBNA now Bank of America, Citibank, and Bank One) are just some of the names of the leading banks among the 6000 issuers of credit cards.  Most use the VISA or Master Card designation.

B) What happens when the credit card becomes delinquent?

@30 days – a nice letter will be sent asking if you have forgotten your payment.

@90 days – the letters will begin to get more serious and even nastier advising that the account is in a delinquent condition and negative credit repercussions are very possible. They may cancel your card privileges.

@150 days – the clock is ticking for the credit card internal collections department.  They know they only have another 30 days to collect before the 180 day charge-off date.  This is the time we have been waiting for, the account and our cash set aside have been aging and growing.  Soon the first settlement letters will be mailed.  Negotiations begin.

@180 days – If collection or settlement agreement is not reached the company must write off account as a loss and will assign account to a 3^rd party collection agency which will receive commissions on any monies collected.

C) Note that Discover and American Express Cards are somewhat different from other credit cards.

-  Discover Cards are the same as other credit cards, except their charge-off date is 210 days.  After this time, settlement negotiations are the same as others.

-  American Express cards are personal accounts that can be handled the same as any other card with up to 50% settlements.  Business accounts are different.  Although the card is in the name of the employee, it is the company that is liable for the debt.  This makes settlements more difficult, but possible.

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