For many consumers who are faced with overwhelming debt on their credit cards, debt settlement could be an option. Debt settlement is a process whereby the debtor and the credit card company agree to settle a debt for less than the original amount owed. This can work only if the debtor has fallen behind on their payments; if the debtor is current on their payments, there is no incentive for the credit card company to negotiate a settlement.
Becoming late on credit card payments will adversely affect an individual’s credit rating; however, owing high balances on credit cards also has a negative impact on credit scores. Obviously, the farther behind a debtor is on his or her credit card payments, the more leverage they have with the creditor. Although standards vary by state, most companies will not send a credit card debt to collections until it has become at least ninety days past due.
There are many debt settlement companies that, for a fee, will negotiate debt settlement with creditors. Most of these companies arelegitimate but there are some who are not. Before signing any contract with a debt settlement company, debtors should thoroughly research the company, particularly their standing with the Better Business Bureau .
Debt settlement is different than debt consolidation. In debt consolidation, borrowers obtain a larger loan to consolidate all their debt into one monthly payment. Nor is debt settlement the same as credit counseling. In credit counseling, an agency negotiates with creditors for a lower interest rate and the consumer repays the actual balance over time, but at a reduced interest rate.
Although individuals can settle their debt on their own, it is often too stressful for them and they are better served to use a professional organization that can objectively deal with the credit card companies. However, many debt settlement companies charge a hefty percentage of the debt settled as their fee, typically up to 18% of the total value of the debt settled, and this fee must be calculated into the amount that can be paid.
In addition to settling a debt, the credit rating can also be negotiated. Any time an account goes to collection, it is an automatic black mark on a credit rating; some creditors require that the account be closed. The manner in which the account is closed makes a significant difference on the credit report. If the account shows closed by the creditor, it will make a black mark on the credit report. If the account shows it was closed by the debtor, there is no stigma attached.
Debt forgiveness can be considered income by the IRS, so debtors should examine their potential tax liability when considering a debt settlement program.
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