Reader Q&A: Settling A Closed Credit Card Account

We recently received this question from a reader who is having trouble keeping up with payments on a credit card that was closed by her card issuer.

Question: I had an ever expanding line of credit at Citi that eventually made it up to $17k when I was a recent and very poor grad student who essentially lived off the card. (Yes!!! Lesson learned.) A couple years ago, Citi decided it wanted out of the relationship and terminated the account. I have been diligently paying the minimum, cutting down the amount owed to $12,000 now. Yes, it’s still bad, but I’m currently unemployed. Lovely.

When a card issuer ‘breaks up’ with the card user, is there any way to reduce the amount owed? Does one REALLY have to scrape the pennies for the minimum payments?

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Answer: Credit card debts are settled for less than the full balance all the time. However, there are usually specific circumstances involved:

The cardholder is experiencing a hardship. It helps to be able to document that you are having trouble making payments because of circumstances beyond your control. In your case, you are unemployed, so you should meet this standard.

The cardholder stops paying and falls behind on minimum payments. I realize it goes against the grain to recommend that cardholders fall behind on their payments, and I have to warn you that it is a risky strategy. Your credit will be damaged and there is no guarantee you’ll be able to strike a deal. At the same time, it’s a fact of life that issuers don’t settle accounts that are current.

I’ve heard from consumers who have paid anywhere from 10 – 85 cents on the dollar to settle their credit card debt. But I don’t know what kind of settlement deal you may be able to strike as it will depend on a number of different factors. However, for settlement to work, you have to be able to come up with a lump sum to pay off the card issuer. Sometimes issuers will stretch out the settlement amount over a few payments, but it’s unlikely they will agree to settle and take small monthly payments over time.

If coming up with a lump sum (from family perhaps?) is impossible, and you are determined to pay back this debt and not file for bankruptcy, then you might consider finding out whether the issuer will offer you a hardship program. I talk more about how hardship credit card programs work here.

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Another option is to meet with a credit counseling agency to see whether it can help you negotiate a better deal with your card issuer. But given the fact that you are unemployed, it may be difficult for you to make payments—even if the counseling agency can help you negotiate a reduced payments.

Finally, if all of these efforts fail, you can talk with a bankruptcy attorney or even just stop paying and take your chances. The debt will eventually be charged off and sent to a collection agency, which may be willing to accept lower payments. Your credit will be negatively impacted by this approach, but it might buy you some time until you get back on your feet and get a job.