When you have reached the point where you can no longer afford to pay your credit card debt, then one of your options is debt settlement. If you were to pay a professional financial firm to negotiate your debt for you then you would be subject to an account setup fee, an ongoing monthly cost and a percentage of the money saved, according to the MSN Money website. You can take the DIY approach to debt settlement and save yourself the fees.
Taxes
In order to prepare yourself to negotiate a lower pay-off amount with your creditors, you first need to understand the tax implications of settled debt. According to the Money-Zine website, the money that a creditor forgives in a debt settlement action is subject to federal income tax. For example, if you started with $15,000 in debt but got the creditor to agree to a $5,000 settlement, then that $10,000 difference is subject to income tax. IRS publication 908 describes how to claim the difference as income on your federal tax return.
Be Professional
There are no state or local laws that mandate that a creditor must accept a debt settlement from you. You may find that many of your creditors will be reluctant when approached with the idea of settling a debt. However, if you explain your situation honestly, and have documentation to back up what you are saying, then you can increase your chances of getting a negotiated agreement. For example, if you send the creditor copies of your unemployment payment reports to prove that you are currently unemployed, then the creditor would be more apt to discuss a settlement with you.
Do Not Wait
Do not put off contacting your creditors to discuss debt-negotiating terms. If you know you are going to run into payment problems, then call your creditors right away. There may be programs or options that creditors are willing to give people who take the initiative and still have accounts in good standing as opposed to people that wait too long, according to the Consumer Reports website.
Have a Plan
Prior to calling your creditors, figure out how much you can afford to pay back and have an offer in mind. Do not speak to the general associate that answers the phone when you call; ask to speak to a manager. If you can visit a local branch of the creditor then that would be even better. Be prepared for your creditors to say no. You may get some that say yes, and some that say no. However, try to have an option available if they say no. Some options include a debt consolidation program, debt counseling or bankruptcy in extreme cases.
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