If you are trying to free yourself from the burden of credit card debt, you’ve got a number of options available. If you lack the means to pay the debt fully over a reasonable period of time but you are unable or unwilling to file bankruptcy, debt settlement could be an option.
How does credit card debt settlement work?
Debt settlement involves making a negotiation offer to the credit card company to settle the amount of money you owe for a lesser amount. If the creditor accepts, you will need to pay the entire settlement amount upfront, in one lump sum.
A credit card company might accept a settlement if you are very delinquent on your payments. It is often less expensive for a creditor to simply accept a lesser amount in settlement than it is to send the account to collections, file a lawsuit, obtain a judgment, and finally attempt to collect on the judgment.
What are the pros of credit card debt settlement?
Given below are a few of the benefits of credit card debt settlement:
- You are paying less overall on your debt during a much shorter period of time. Paying the debt off immediately means paying no more interest, and settling means that you are paying even less than you currently owe.
- Debt settlement is not as harmful to your credit as bankruptcy if your credit is not already poor.
What are the drawbacks to credit card debt settlement?
Credit card debt settlement has a number of benefits. On the other hand, it also has multiple drawbacks. Some of them are as follows:
- Debt settlement is risky: If you stop making your credit card payments in an attempt to save up enough money to offer a settlement, your credit card company can sue you, obtain a judgment, and garnish your wages and bank accounts. Even if you notify the creditor of your intent to settle, absolutely nothing legally stops the creditor from collecting.
- Using a debt settlement company is even riskier: Many of these companies will advise you to default on your credit card payments and pay the money to them instead. After taking a monthly fee, they’ll put the rest of your payments into an account to accumulate a lump sum that’s large enough to offer the credit card company. Today, there are hundreds of fraudulent debt settlement companies, and it can, thus, be very easy to get pulled in by a debt settlement scam.
- Debt settlement creates income tax liability: When your credit card company forgives any amount of the debt, the IRS and your state government will see the debt forgiveness as income to you. The difference between your original balance and the settlement amount is taxable income, and you will have to pay taxes on it unless you qualify for an exception or exclusion.
What are your negotiation options for credit card debt settlement?
Before you negotiate with a credit card company on your own, you should try and get familiar with the types of settlement options that are usually available to consumers. If the credit card company is willing to look at the idea of a debt settlement, then there is a high chance that they will want to make one of the following arrangements:
Lump-Sum Payment Agreement
In this case, you negotiate with a credit card company to pay a sum of money that is less than what you owe. Of course, this option only works if you have enough cash available to make such a payment. If you receive a bonus at work, or an inheritance, or are willing to raid your savings, you can use them to offer a one-time payment and in return, get forgiveness of the entire remaining balance.
For this option, the credit card company should be willing to lower your interest rate, waive or at least reduce the minimum monthly payment, or remove late fees in an agreed-upon plan. This option can often help you reduce your overall debt and, thereby, help you pay it off in a shorter period of time.
Hardship Payment Agreement
This could be a good option for you if the reason you are having trouble paying credit card debt is due to an illness, a job loss, a natural disaster, or another temporary hardship. You may be able to arrange for lower minimum payments, interest rates, and fees. You may also be able to suspend payments without penalty for a limited period of time.
Generally, a majority of people are able to work out settlements with their credit card companies even without getting assistance. But if you do require help handling the negotiations, you can always consider hiring a debt settlement lawyer.