If you cannot afford to pay your way out of your debt, you may be able to negotiate down your balance to the point where you can. You can use various strategies to negotiate down your balance, and you can even hire companies to help you. However, all debt reduction strategies have additional consequences, including possible taxation and damage to your credit report.
Negotiating Yourself
The most inexpensive way to negotiate credit card debt may be to call your creditors yourself. If you can't afford to pay your entire balance, first determine what you can afford to pay. While some creditors may accept your suggestion of a lowered balance, they will want something in return, usually a lump-sum payment. Whether the credit card company accepts your offer of an upfront payment or a short series of installments, only promise what you can legitimately afford to pay. If you negotiate down your balance and then break your agreement, you will most likely be sued. You may find that you have more leverage in negotiating down your balance after you have already missed a few payments and your creditor is concerned about your ability to pay.
Hiring a Company
If you don't want to try reducing your debt on your own, you may consider hiring a debt management or settlement company. While many companies advertise the ability to reduce your debt, many charge high fees and can produce questionable results. Nonprofit agencies affiliated with reliable industry groups such as the Association of Independent Consumer Credit Counseling Agencies may be your best bet. If you do work with a settlement company, you will typically have to make a monthly payment to the agency for distribution to your creditors. Whether or not your creditors will agree to reduce your balance depends on the size of the payment you can make and the expertise of your chosen agency.
Taxes
Regardless of how you manage to reduce your debt balance, you may face a penalty in the form of income taxes. The Internal Revenue Service treats debt reduction as a taxable event, meaning you will have to pay ordinary income tax on the full amount by which your debt was reduced. For example, if you negotiate down a $20,000 debt to $5,000, you will have to report that $15,000 reduction to the IRS as taxable income.
Credit Report
Debt reduction is also damaging to your credit report. If you negotiate down a credit card debt, your report will show that you did not pay your account in full. While this may be less damaging than filing bankruptcy, having a notation that you paid less than you owed will be a negative on your report. A lower credit score may limit your future opportunities for getting additional credit.
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