Settlement on Credit Card Debt
There are many different ways cash strapped consumers can eliminate their credit card debt. The best way to reduce debt while protecting the always important credit history we all value is through hard work and discipline. By paying your debt in full through additional payments and cutting unnecessary expenses you can feel pride in the fact that you eliminated your debt while fulfilling your financial obligations. Unfortunately not every person has the resources and financial situation to repay their debt in full. For those individuals there are other ways to reduce debt, some of which have risks but also provide instant relief to the sometimes overwhelming credit card payments millions of people are currently struggling to maintain. One of those methods is debt settlement and here we will discuss the process and potential results from negotiating your credit card debt.
Debt Settlement If you find yourself in a position where repaying your debt in full or even qualifying for a debt consolidation program is not an option, you may want to think about settling your credit card debt. You can do this either on your own or by hiring a company to negotiate on your behalf. The basic premise of debt settlement is asking your creditor to accept less the amount you currently owe to settle and close the account. While it is true that credit card companies are not in the business to lose money, many of them understand that many people are falling behind on payments and face an uncertain future in terms of recouping their money. With this in mind some creditors will consider accepting less than the full balance to avoid not receiving any payment if the account holder is forced to file for bankruptcy. A creditor will not negotiate a settlement on an account that is current and certain other circumstances would lessen the chances of a successful settlement negotiation. If you have recently racked up a large balance with few payments made toward the balance, the creditor may consider the act fraudulent. The same applies for people who just transferred a balance to a new credit card. When a creditor does consider a settlement, the account holder should be prepared and able to pay one lump sum settlement payment or in some cases two to three structured payments to settle the debt. Once the credit card company receives the agreed upon amount, the account is then closed and considered paid (generally not reported paid in full, rather settled for less than the amount owed) on your credit report.
Consequences of Debt Settlement Considered one of the most risky methods of eliminating debt short of filing for bankruptcy, debt settlement has the following potential negative consequences.
- Legal ramifications- If your creditor is not willing to settle your debt, you may find yourself subject to a law suit where you will likely end up having to repay the full balance on your credit card account. Since this generally occurs months after you have made your last payment, the balance will be higher due to interest rates and various fees and penalties resulting in owing more than you did when the process began. You then are vulnerable to wage garnishments and other actions to help repay your creditors the amount owed.
- Tax issues- Any debt over $600 that is forgiven must be reported to the IRS. In most situations if a person was qualifying to settle their debt, they would be able to avoid paying taxes through the “insolvency” clause from the IRS, but it is possible you would be responsible for paying taxes on debt that has been forgiven via a settlement.
- Damage to your credit- Once you negotiate your debt, your debt to credit ratio will improve, however it will be a long time until your credit recovers. The amount of time is less than filing for bankruptcy but varies for each person and situation. The fact that you paid less than the amount due and did so after your account was past due does not show favorably on your credit history.
Settling credit card debt is a legal and often necessary step for consumers who lack the resources to work out a debt payment plan or pay their debt in full. Before considering this option, carefully research the process and any company you may consider working with to eliminate your debt to ensure the method is the right one for your situation.
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