Is it Good to Settle Credit Card Debt?

Creditors may be willing to cut their losses on consumer credit card debt and accept less money than some customers owe on their accounts. There are drawbacks to settling with creditors because debt settlements usually cause credit scores to drop. However, settlements may be the best option for some people who are deep in debt and have no other way to pay their creditors.

Settlement Process

Credit card companies that work out settlements directly with consumers rather than through collection agencies usually come out ahead. According to a Consumer Reports article titled "How to Settle Your Credit Card Debt for Much Less," banks received as little as six cents on the dollar from accounts turned over to collection agencies in 2008. However, your credit score will be damaged by the time a credit card company agrees to a settlement with you. Companies often won't agree to accept less than they're owed until their customers' accounts are 90 days or more past due and it appears they won't be able to pay the full amount they owe.

Damage Control

Some people can use credit card debt settlements to avoid filing for bankruptcy and reduce damage to their credit histories in the long run. Late-payment notations on delinquent credit card accounts can remain on consumers' credit files for seven years. However, bankruptcy filings appear in credit reports for 10 years. An MSN Money article titled "Credit Card Debt: How to Cut a Deal" says some creditors are willing to lower cardholders' rates and minimum monthly payments in agreements that can help consumers who have fallen behind on their payments bring their accounts up to date.

Income Taxes

Consumers who settle with creditors by paying less than they owe should expect to have their accounts closed. Credit card companies won't allow customers to continue racking up debt if balances aren't paid in full. People who manage to get their creditors to agree to reduce their debt may end up paying more in taxes. Cardholders whose creditors forgive more than $600 of the debt they owe may have to pay additional income taxes because the unpaid amount can be counted as income by the Internal Revenue Service.

Considerations

Companies that negotiate consumer debt settlements can charge high fees that sink people deeper into debt. Consider negotiating your own debt settlements before seeking outside assistance. Work out a budget for all your expenses before contacting your creditors to ensure you don't offer to pay more in a settlement than you can reasonably afford. Consumers who agree to a settlement or payment arrangement that they fail to pay may not get another opportunity to work out an affordable payment plan. Consider contacting a nonprofit counseling agency such as the National Foundation for Credit Counseling if you're unable to settle your credit card debts yourself.