If you have extremely high credit card balances and interest rates, negotiating with your creditors to force a settlement seems like a logical path to save money and solve your financial woes. However, merely suggesting to a creditor that you wish to negotiate your outstanding debt can cause problems, and the impacts can become even more severe in the future. Whether you choose to negotiate with the creditors yourself or with the fee-based assistance of a third party, the negative consequences of this approach are far-reaching.
Account Closure
Sometimes, just the indication to your creditor that you wish to negotiate and settle your outstanding credit card balance is reason enough for the creditor to immediately close your account and put it into a default status. This may mean higher interest rates, inability to use your credit account for future purchases, and loss of available credit. Having your account closed may also result in the loss of your reward points or outstanding cash-back rebates. Even if you were just curious as to what your negotiation options may be, the creditor may panic and simply close your account to limit future liability.
Negative Credit Reporting
Creditors are not likely to negotiate with you as long as your account is in good standing. If monthly payments are coming in, even if only the minimum amount and you don't exceed the credit line, creditors are typically happy. Often, getting your creditor's attention for a negotiation means missing payments and getting your account placed into a charge-off or high-risk status. At this stage, the creditor is more likely to talk to you about possible debt settlement. Unfortunately, being delinquent on your payments for 90 or 120 days is a negative on your credit report. Expect further damage to your credit after a negotiated settlement.
Tax Liability
If you settle a credit card debt for less than what you owe, you may find yourself on the wrong side of a tax liability. When a creditor receives the negotiated payment, he may issue a 1099-MISC IRS tax form to you for the debt written off. The creditor views this as income to you since you never repaid the funds he advanced. This will result in additional income you must report on your tax return.
Collection
Although you paid the settlement as an agreement to close the account legally, you still owe the remainder of the money. Credit card issuers will often turn over the balance written off to a collection agency. You may receive collection calls and aggravating notices in the mail. You may also see notes of collection showing up on your credit report, and some debt collectors may even try to obtain a court judgment against you for the money.
Inability to Obtain More Credit
Negotiating your debt via a settlement will negatively affect your credit score and harm your creditworthiness. Fortunately, your credit score can recover with a good display of payments and use of credit in the future. Plus, these charge-off comments drop off after seven years. However, the individual creditor may keep a record of this on file, which may permanently disqualify you from ever obtaining future credit from this particular lender.
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