Q: Because of some really negative circumstances and foolish decisions on my part, I have a very large amount of credit card debt that’s about to become unmanageable (0% rates going into the 20s). A friend suggested negotiating down the debt with the creditors.
A) Is that possible?
B) Won’t that negatively impact my credit just like a bankruptcy?
A: I can't tell you for sure how a credit card company will react to the request to negotiate down debt. I can tell you one listener's story. A listener wrote me years ago telling me that they tried to negotiate their credit card balance. The credit card company immediately turned their account over to collections. I initially thought that was a little drastic. However, it did make sense.
Keep these three things in mind when you are considering this step with your credit card companies:
It is a red flag to the credit card company - the credit card company might think you are in trouble and put you in collections as a proactive measure.
The credit card company as a rule has no motivation to help you out with the debt you incurred.
The large potential downside outweighs any limited potential upside.
Now you can ask the question about interest rates. You can check to see what you can do to lower your interest rates. I have heard that conversation can go well.
Forgiving debt does not hit your credit like a bankruptcy. However, keep in mind, that you do owe income taxes on debt that is forgiven. The IRS treats it just like income earned. If you think about it, you might make a bad situation worse. Owing income taxes you cannot pay can be worst than the credit card debt.