Negotiating credit card debt can be an intimidating process. Many people choose to use a credit counseling firm. If you choose to do so, ensure that the credit counselor is a Not-for-Profit 503(b) certified credit counseling agency that is independently accredited by a third party accrediting company (such as the National Foundation for Credit Counselors or the Council on Accreditation). However, it is possible to negotiate debt yourself.
When Should You Negotiate Debt
You should only negotiate debt as a last resort before bankruptcy, when you are unable to pay your credit card bills any other way. Prior to settling or negotiating debt, you should try to consolidate debt to lower your payments and/or speak with your creditors to see if you can lower interest rates. Negotiating debt, or paying less than you owe, can have a strongly adverse impact on your credit report. Although it is better than a bankruptcy, you typically must have late payments before a creditor will agree to negotiate, and the debt will also be reported as "settled" as opposed to "paid in full." Both of these things can cause your credit score to fall and it may take seven to 10 years to recover depending on the extent of the damage done.
How To Negotiate Debt
Credit card companies generally will not negotiate with you to settle debt for less than what you owe unless you are in danger of defaulting (paying nothing). When you are "current" (making payments on time), creditors have little incentive to negotiate. A phone call to a creditor to ask them to lower your interest rate might be effective if you are good customer, and/or if you explain to someone with decision-making authority that you are having trouble making your payments. However, this will not happen in many cases.
For most creditors, the incentive to negotiate is to avoid sending a credit account to collections. When a creditor gives up hope of you paying your debt, they typically sell the credit account to a collection agency for pennies on the dollar. Rather than doing this, creditors would prefer to negotiate directly with the consumer to get more than the value they would get from the collection agency, even if it is less than the full amount owed. Creditors usually sell debt to a collection agency when you are six months behind on payments, so the best time to settle debt is after you are at least 30-90 days late on payments, but before six months has passed.
When you are ready to negotiate, get everything in writing. Do not send any money until you have an official letter from the creditor stating the terms of the settlement, and how it will be paid. Creditors usually prefer and are more amenable to settling if they are offered one single lump sum payment, but will sometimes agree to a payment plan. The letter should also state which debts will be settled, and for how much. After you have all the terms in writing, send a check or money order--do not give creditors access to your bank accounts.
Taxes
Be aware that you may be taxed on the amount of forgiven debt as income. This means you will receive a 1099 listing the amount of forgiven debt, and you will need to enter this is "miscellaneous income." In some cases, this can have a dramatic impact on your taxes and push you into the next highest tax bracket, depending on your income and how much debt is forgiven. Even if the "miscellaneous income" does not cause you to change tax brackets, you are still generally charged higher on "1099" income than on income from an employer, because you have to pay your own social security taxes on "miscellaneous" income, while employers subsidize and pay a portion of this tax under normal circumstances.
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