What you need to Know about Credit Cards Debt Settlement

Credit cards debt settlement represents a better option to people who are in the brink of considering bankruptcy.

Debt elimination is a major undertaking in achieving financial freedom. People in heavy debt are bound to consider any possible way to settle it and get out from debt misery.

Credit cards debt settlement is a program to eliminate debt. The program involves establishing an agreement between debtor and creditor with the latter agreeing to accept a reduced amount of payment as full settlement of the debt.

This can be done by direct negotiation of the debtor or by acquiring the services of a debt settlement agency to handle the negotiation on the debtor’s behalf.

Reasons in Getting a Debt Settlement

Credit Cards Debt Settlement - Debt FreePeople may choose to adopt credit cards debt settlement if he/she is in the following situation:

  • The person has delinquent unsecured debt.
  • The person failed in making payments for over three months.
  • The person is at the state of financial incapacity to make payments for his debts.
  • The person may have better chances of paying if the debt will be reduced.
  • The person is about to consider filing a bankruptcy.

As a note, most debt settlement companies would prefer to represent people who have debts that worth at least $10,000.

Credit Cards Debt Settlement Program – How it Works

  1. Upon adoption of the program through a debt settlement company, the debtor will make payments for a certain period that will be accumulated into a settlement fund.
  2. As soon as enough money is deposited in the fund, the debt settlement agency will negotiate with the creditor and establish the acceptable amount of the debt settlement.
  3. After the agreement has been finalized, payment of the debt will be made accordingly to settle the account in full.

Consequences of Debt Settlement

Although credit cards debt settlement would generally provide valuable means of getting out of indebtedness, it also exposes the debtor to unfavorable consequences.

Tax Implications – If you were able to settle your debt with an amount lower than what you owe, the IRS would consider the difference as income, which is taxable.

Creditors who agreed for a settlement is required by law to send Form 1099-C to the debtor and the IRS at year end. The debtor in turn should declare the settlement difference as income. Failure to report to the IRS would result to a tax bill that would require you paying interests and penalties.

Effect on Credit Score – When the debtor stops paying the creditor in line with the settlement program, it will reduce credit score between 65 to 125 points. With the settlement agreement, you do not actually pay the debt in full amount, and the account would be reported by the creditor as “Paid as Agreed” or “Paid as Settled”. Such remark will remain on the consumer’s credit report even after the settlement of the debt for seven years.

People who have great credit card debt should not despair, but instead be determined in looking for solutions to be free selves from indebtedness.

Make credit cards debt settlement program your way to financial freedom.