In theory, credit card issuers want every cent owed them. But in practice, they realize that there are times when they must agree to accept a lesser amount for a debt, since they otherwise could wind up with nothing. That’s just the truth about credit card debt relief. But is the financial strategy right for you? Let’s take a look.
What is Credit Card Debt Settlement?
It’s essentially what we’ve discussed: an agreement wherein the creditor agrees to accept less than the amount owed – usually between 50% and 80% — to satisfy the debt.
How it usually works is, you hire a debt settlement or debt relief company to negotiate with your creditors on your behalf. You’ll also typically be asked to stop paying your creditors as an inducement to get them to settle, and instead make monthly deposits into an account that you control. When you have accumulated sufficient funds, the company will begin negotiations with each creditor. After reaching agreements, the company disburses payment to your creditors.
It’s Not a Scam, Is It?
No, it’s a legit financial process, but you want to hear more truth about credit card debt relief? Not everyone has your best interest at heart. For example, never pay in advance for settlement help – that’s against the law. Also be wary of companies that guarantee upfront that they can pare your debt or prevent collections calls – they can’t. Do your homework to ensure that you have a reputable, experienced company working for you.
Potential Adverse Consequences
The financial strategy has rescued scores of people from debilitating and overwhelming debt, and let’s face it: it’s at times the only reasonable way to do it.
But it’s not for everyone. Here are some challenging issues you may face when negotiating credit card debt:
- High fees. Debt relief will cost you but look at it this way: at least you have a way out, and a chance to begin anew. The fees are usually a percentage of your overall debt, or the forgiven amount, the company has negotiated for you. You’ll usually end up paying between 15% and 25% of the amount of debt settled.
- Worsened credit. Yes, your credit will take a big hit because you’ve stopped paying your credit card issuers as part of your program. What’s more, the fact that you’ve settled usually appears on your credit report and stays there for up to seven years.
- Unexpected taxes. If the amount of forgiven debt is $600 or more, you’ll likely have to pay taxes on it. However, if your liabilities exceed the value of your assets, you may be able to lower your tax liability.
- Gathering the funds. Some consumers have trouble amassing the settlement cash before their deadlines. You need be diligent about reducing spending and socking away funds so that you can complete the program.
- No guarantees. Most companies require a certain amount of debt before taking a case on. Perhaps your debt load isn’t big enough. And even if it is, creditors are not required to bargain with you. They usually do – but there’s no guarantee they will.
Benefits of Debt Settlement
If you’re wrangling mightily with credit card debt, debt relief as a financial strategy merits consideration. Just be mindful of the implications and be sure to choose a company with a proven track record. If you choose currently, you could soon be on a much better financial path.
And that’s the truth about credit card debt relief.