When faced with credit card balances and interest fees that are spiraling out of control, you may be inclined to pay attention to the television commercials that offer to help you reduce your debt by enrolling in their debt settlement program. These firms negotiate lower payoffs on your credit card accounts. In many cases, the programs do succeed in obtaining a favorable settlement on your behalf, but often with consequences that are not as desirable.
Program Costs
Debt negotiation groups help you obtain settlements on your credit card balances. However, they do not offer their services for free. In some cases, you may not pay upfront fees to enroll, but you will incur administrative and contingency costs. For instance, there may be a monthly fee for program enrollment or a fee each time a payment is made to a creditor. The debt negotiation groups often charge contingency fees based on the amount of debt their negotiation efforts saved you. These costs may be worth it, but you are required to pay these in addition to any credit card balances.
Credit Score Fallout
To force a settlement offer, the debt negotiation group often asks you to stop making payments to your creditors. When payments are not being made, it is more likely the creditor will entertain a settlement offer. This technique may help achieve the desired consequence, but, in the meantime, the delinquent payments are reported to the major credit bureaus. This alone will have a detrimental impact on your overall credit profile. Additionally, once the settlement offer is complete, your credit report probably will show the account as being charged off or settled. This further reduces your credit score and remains on your credit report for up to seven years.
Debt Cancellation Income
When you complete the settlement and pay the reduced balance, the amount you do not pay is what the card issuer charges off. You may end up having to pay taxes on that cancelled debt amount as income if the card issuer generates a 1099 form for the cancelled debt amount. If this happens, you have to report this amount as income on your tax return, and you may end up owing money to the IRS as a result.
Difficulty Obtaining Financing
Your weakened profile as a result of a debt settlement program may be enough to prevent you from obtaining new credit. Further complicating the matter may be your relationships with the actual card issuers. If after completing the debt settlement program, you establish a habit of responsibly managing your credit, the negative marks eventually will vanish, and your score will improve to levels that would suggest you are a creditworthy borrower. However, the specific issuers may never delete your account history, and they may automatically reject your applications for new credit based on your past charge-offs with them.
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