Anyone with a substantial amount of credit card debt may be looking for a way to relieve their debt load. One way to achieve debt reduction is through the process of debt settlement. When you settle your debts you can run into several problems. Before you settle your debts contact your creditors and try to make a deal or negotiate regarding the situations that you deem to be problems. If you can resolve these issues you will save yourself time and frustration.
Debt Relief Programs
When you settle your debts you may be able to get this done with the help of a debt relief company. These companies are able to help you settle your debt, sometimes as little as 50 percent of your outstanding payments. The primary problems you encounter with debt relief companies are the fees. Some of the fees they charge consumers are substantial. Your fees could be based on 15 percent of your total outstanding debt. Fees can be based on the number of creditors you bring into the program. Each company appears to have its own way of charging fees. To get a breakdown on the fees you must submit all of your credit information beforehand.
Tax Obligation
When you settle your credit card debt you may be required to pay taxes on the forgiven debt. If you have a balance with a credit card company in the amount of $8,000 and you settle for $5,000 you may be required to report $3,000 as taxable income when you file your taxes. When your debt is settled you may receive a 1099-C, which is a debt cancellation form, to be filed when your taxes are prepared. If you receive this form contact a tax professional or tax attorney for advice.
Credit Reporting
Creditors will report settled debts on your credit file as a "paid settlement." Other creditors will be hesitant about extending you credit because they will know you experienced a financial hardship in the past. If you are able to get approved for credit you will be charged the highest interest rate possible based on your credit history. Some creditors will add a substantial number of fees when you apply for a credit card account. Debts that are settled remain on your credit file for seven years.
Secured Credit Card
After settling your debts you may have to apply for a secured credit card. This type of credit card is secured with a bank account. You need to open a bank account with a deposit of $300 to $500. Your credit limit is based on your deposit. When payments are late the past due amount is pulled from your bank account. Some secured credit cards don't appear on your credit report, which prevents you from reestablishing credit.
Collection Agency
When you settle your debts with a collection agency it's a good idea to get everything in writing. Some debt collectors have tried to collect on debts that have been settled. A written agreement is your proof that you have paid the balance according to the agreed-upon terms and agreements.
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