Credit card settlement may also be a possibility for borrowers who are having difficulties with overdue balances, as well as those who cannot pay the full amount. In these cases, the borrowers may be able to negotiate with the creditor, thereby settling the account by paying less than the total amount.
For the majority of credit card borrowers, credit card settlement is not necessarily the first option they consider. However, when the debt becomes unmanageable, as well as when the full amount cannot be repaid, the option of settlement becomes a viable way of settling the account.
Settlement is just one of the many options available, and the best option depends on the income of the borrower, the total amount of debt, as well as the alternatives.
What is a Credit Card Settlement?
Credit card settlement is the act of an individual being unable to pay in full an existing balance and the lender accepting a lesser amount due than the entire balance.
Examples of a situation that could lead to a negotiated settlement:
Protracted non-payment
Repeatedly late with payments
Extreme cash flow difficulties
Inability to make normal installment payments
Essentially, in these instances, the lender is willing to settle for less than the total balance due to them because of the possibility that they will be paid in the future.
A bank's negotiated settlement percentage in India cannot be defined publicly because each case is negotiated individually.
In many cases, the final settlement amount is negotiated based on several factors, including:
How long has the debt been outstanding?
Borrower’s ability to pay
Lender’s internal collection policy
If the lender will settle for a lump sum payment
If the lender is actively trying to collect this debt through legal means or otherwise
If we were to use an example, you owed the lender ₹1,00,000, and you were to settle for an amount that was less than what you owed, and this was based upon the merits of your case and how the lender felt.
Generally, rather than asking "what percentage will the bank settle for," one should be asking "is settling really the best option."
In Which Situations Would Banks Choose to Settle Cases Against Borrowers?
The circumstances in which bank settlements occur are as follows:
1. The borrower faces financial hardship.
2. The borrower has little chance of fully satisfying the debt (i.e., has limited ability to repay).
3. The costs or time involved in seeking full repayment will be greater than any possible benefit from doing so.
4. It is normally more efficient/beneficial to settle the case through an agreement rather than allowing it to remain unresolved.
Thus, bank settlements are not intended as a favor or as a shortcut. Instead, they are merely a financial tool to allow both parties to agree to an arrangement regarding the debt resolution.
Is credit card Settlement Good for Borrowers?
Not always.
Settlements are not suitable for all borrowers; however, there are numerous situations where borrowers should look into settlements as an option. If borrowers can pay in full in time, or if they can look for other alternatives, such as consolidating debt, to pay off debt, then they should look into those alternatives.
However, in situations where borrowers have reached an unmanagable state, such as delinquency, which cannot be rectified, then they can benefit from settlements in several ways, such as:
1. Less stress from being delinquent
2. Paying off debts
3. Having a plan to start to improve their finances
4. Preventing further damage to their financial state
Instead of asking, "Is this something that the borrower should be looking to avoid?"
The question should be, "Is this something that is suitable for this borrower?"
What are the trade-offs?
A balanced article will include both perspectives.
Possible advantages
Lowers immediate financial burden
Provides opportunity to negotiate settlement of debts
Provides answer to escaping debt trap for a protracted period of time
Provides solution for a person in a difficult situation
Things to consider carefully
The credit will be shown as "settled"
This may affect ability to borrow in the future
Documentation will be important
Settlement should only be considered when all other possibilities have been researched
When could a settlement make sense?
People may benefit from considering settlements when:
The individual has lost a significant portion of their income
The individual is struggling to manage 2 or more monthly EMIs or credit card payments
The individual does not have any cash saved
The individual is unable to pay off all debt
The individual is seeking a solution to a problem, rather than a never-ending cycle of being overdue
What options should be considered before making a decision to settle?
Borrowers should compare the proposed settlement with the following options:
1. Loan Consolidation - This is an option to create one, more convenient, system to pay all debts.
2. Structured Repayment/EMI Conversion - This is applicable to borrowers with stable income, as they will be able to pay in installments.
3. Debt Resolution/Negotiated Settlement Support - This is applicable to borrowers with overwhelming payments and in dire need of expert support in creating a plan to settle debts.
Again, this is where the importance of getting a professional assessment comes in, as we will be able to determine which option is best for each borrower depending on several factors, such as cash flow, credit history, credit score, and total debt.
What We Can Do At FREED
The mission of FREED is to help borrowers choose which solution works best for them, rather than advocating for one solution over another.
Depending on each borrower’s unique situation, we can:
Determine whether consolidation or settlement is the better solution for each borrower.
Educate each borrower on each solution’s consequences.
Help borrowers with structured negotiations.
Help each borrower create a plan to resolve each situation.
Help each client prepare for long-term recovery after debt resolution.
Bottom Line
Credit card settlement should not be seen as a way out or a shortcut to pay off debts. Rather, it should be seen as just another alternative for those who are in financial trouble. There are various ways for you to settle your debts, which may include consolidating your debts and/or coming up with a plan to pay off your debts, and for those whose ability to pay off debts has already been exhausted, settlements, and most importantly, there are ways for you to get back into a positive financial situation once you are able to settle your debts.
The most important thing to remember in making your decision is to make it based on your current financial status, and not based on fear and what you think your financial status would be in the future.
FAQs
1. What is the typical credit card settlement percentage in India?
It usually ranges between 40% to 80% of the outstanding amount, depending on the case.
2. Does settlement affect CIBIL score?
Yes. A “Settled” status negatively impacts your credit score and future loan eligibility.
3. Can I negotiate credit card settlement?
Yes, banks may negotiate based on your financial situation and repayment ability.
4. Is settlement better than paying full dues?
No. Paying full dues is always better for your credit profile.
5. How long does settlement impact remain on credit report?
It may remain for several years and can affect credit decisions during that time.