Today, credit card issuers may be willing to settle some old credit card debts for just pennies on the dollar. While some people turn to debt settlement companies to help them in this process, there is a great deal of risk in using some of these companies. With some work, you can settle your credit card debt on your own and save some money.
Accounts That Can Be Settled
Generally, unsecured credit accounts can be settled, but it gets more complicated than that. Your best chance of settling debt is for the debt to be past due, sometimes by several months. A creditor does not generally have any interest in settling a debt that is current, as they feel that they are likely to get paid in full on the account.
Lawsuits Pending
Since the debt must usually be past due in order for the creditor to consider a payment, you will need to keep the debt past due while you negotiate with the creditor. In the meantime, there is a chance that a creditor could sue you for the balance of the debt. You can still settle the debt while the lawsuit proceeds, but it can add stress to your life as you work out the debt.
Lump Sum
To have real negotiating power, you must be prepared to offer a cash settlement to the creditor. They are interested in collecting as much money as possible quickly, and cash offers are very appealing to debt collectors. Most experts say that you can settle debt for 50 cents on the dollar. You should start negotiating below that amount, and work your way in that direction. When you have an agreement with the creditor, make sure that you get it in writing, and do not pay them any money until you get that agreement in your hands. Keep this agreement with a copy of your payment together in a file forever, because the chances are good that another collector will bring this debt up again someday.
Tax Consequences
When you settle debt for less than you owe, the IRS considers the amount of the debt that is forgiven in the settlement to be taxable income. They will probably send you a form 1099-C, and you will be required to claim this amount as income on your tax return. This could increase your tax liability for the year. Still, any amount of tax increase will be less than the amount of debt that was forgiven, so you should come out ahead.
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