How Does Credit Card Debt Arbitration Work?

Credit card debt arbitration is a process that settles your current debts with an existing lender. It is important to know you will have to pay a portion of your debt in order to successfully settle. However, through successful arbitration, the portion you pay can be lowered to an amount much easier for you to handle. This can save you from problems, such as bankruptcy or default, on the debt. The process is never straight forward because it depends largely on the regulations in your state and the position you are currently in with your lenders, as well as individual lender policy.

Step 1: Notify Your Lender

The first step is to notify your lender of your wish to settle your debt. Some lenders have a standard procedure for this, and will give you a payoff quote right away. In this step, the payoff quote is likely to sit right at the current debt level. Once you enter arbitration, you can attempt to lower the quote. It is best to notify your lender while your payments are current. Then, you should continue to make minimum payments throughout the arbitration process in order to prevent fees.

Step 2: Find an Arbitrator

You can use an attorney or a debt arbitration company to help you negotiate your debts. Using your existing attorney provides the benefit of trust; you have a history with this person, and you can trust him or her to do the job. The same may not be true of a debt arbitration company, and there are many debt settlement scams out there to be wary of. However, if you do find a trustworthy arbitration company, you may find these individuals have more experience in the area you need help with and are able to secure you the lowest possible payoffs. You may also go about mediation yourself and avoid paying a counselor.

Step 3: Determine Your Budget

Before you begin negotiating, you have to have a goal in mind. What can you afford to pay the company in this one-time settlement? If you have been pre-approved for a settlement loan, the loan amount is your upper limit. Remember that you will have to pay this loan off through monthly bills, so only use this option if you can afford to do so. If you are paying the company with cash reserves or another income source, determine how much you can truly afford to pay.

Step 4: Negotiate Payment

Lenders may accept a one-time payment for credit card debt if they believe the benefits outweigh the costs. For example, if you owe $20,000 in credit card debt and fees, a lender is unlikely to settle if it knows you earn $150,000 per year. However, if you inform the lender you are facing bankruptcy due to other debts, it may want to settle to avoid receiving a much smaller amount if the debt goes to bankruptcy. Credit card companies are most willing to forgive excess fees rather than principal debt. If your $20,000 bill includes $15,000 of actual debt and $5,000 in fees, try to settle for $15,000. The creditor loses only profits, not actual cash paid out from your purchases.

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