Negotiating Credit Card Bills – Part Two (Debt Settlement)
In our last post, the first of a three-part series on negotiating credit card bills, we talked about credit counseling. Today we are going to talk about how debt settlement works and if it is something that you should consider.
As explained in part one of our serious, credit counseling is when you pay back your credit card bills in full but do so at a reduced interest rate. The simple fact is however, that some people cannot afford to do that.
If you find that you are someone that can no longer afford to pay your credit card bills even when the interest rates have been reduced or eliminated then debt settlement may be an option you want to look into.
Basically debt settlement is an alternative to bankruptcy. Debt settlement companies charge their clients a fee which is based upon the amount of debt that they currently have.
The debt settlement company will close all of your credit card accounts and require that you begin making payments to them which will go into a fund which will be established to pay off your settled debts.
The debt settlement company then negotiates on your behalf a payoff an amount with each and every one of your creditors. All situations are different but the average debt settlement service usually advertises that they can eliminate up to 50% of their clients debt.
The payoff for the client can be made either in a lump sum or on a payment schedule and is directly made to the debt settlement company who then makes payments to your creditors on your behalf.
Simply stated, a debt settlement company works to reduce the amount of money that you owe by as much as they possibly can.
The ramifications of debt settlement are that your credit score will take a serious hit losing anywhere from 45 points to 125 points. Your credit report will also have a negative mark on it showing that you have made partial payments on settled debt.
And it must be stated that settled debt is taxable. Any and all of your creditors that you have arrived at a debt settlement with will issue you a 1099-C at year’s end. You will then be responsible for paying federal income taxes on that amount.
So as you can see debt settlement is quite a bit different than credit counseling and debt consolidation.
Be sure that you weigh your options very carefully before deciding to take this route because it will have very serious ramifications on your finances for many years to come.
Related Information:
- Negotiating Credit Card Bills – Part Three (Debt Negotiation) Get our timely advice on how to negotiate credit card debt. Find out how you can save money by negotiating with your creditors....
- Negotiating Credit Card Bills – Part One (Credit Counseling) Credit counseling may be very beneficial to you. Find out more about how it works to see if it's something you should look into....
- The Rising Tide of Fraud Committed by Debt Settlement Companies Be on guard for fraudulent debt settlement companies. We show you what to look for....
- College Students and Credit Card Debt Read this informative article about students and credit card debt....
