What Forms Do I File if I Settle on a Credit Card?

Settling a credit card is an option once you are behind on your debt. When you settle a credit card you pay less than you currently owe, in a lump sum, and the credit card company agrees to forgive the remaining amount of the debt. Settling a credit card does negatively affect your credit score, but it is better than having outstanding bad debt on your credit report. Settling a credit card debt requires filing certain tax forms and keeping certain documentation on hand to prove your settlement.

Settling a Credit Card

You can settle a credit card using a debt settlement company or you can do it yourself. If you are doing it yourself you should contact the company once you have between 25 to 50 percent of the total amount you owe saved up. You can offer to settle the debt by paying a lump sum. Start by offering less than you actually have so you can negotiate up. If the company agrees to accept the money as settlement and consider the card paid off, ask them to mail you a letter that states the payment will count as settlement in full before you mail them a cashier's check as payment.

Information to Keep on File

You should keep a copy of the cashier's check and the letter stating that the debt has been paid off in your files. You will need to keep this on file indefinitely, because it is not uncommon for the company to contact you again, even though they have agreed the debt is paid in full. Pull a copy of your credit report in a few months to check to see if the debt reads settled. If it is still outstanding on your credit report, you will need to contact the company to have them report to the credit bureaus that it is has been settled. If you worked with a debt settlement company, you need to keep a copy of all the paperwork they give to you.

Tax Forms to File

When you have a debt forgiven, the IRS considers the amount forgiven to be income. This is the only official form that you will need to file once you settle debt. The creditor will send you a 1099-C form and you will need to use that form when you file your taxes. You will need to pay taxes on the forgiven amount according to your tax rate. This means you should set aside extra money after you settle to cover your taxes at the end of the year.

Alternatives to Settling Debt

Settling debt does reduce your credit score, though it is better than bankruptcy. You can try to pay off your debts yourself or use a credit counseling agency to get control of your debts. The agency will help you create a budget and work with your creditors to reduce monthly payment amounts and lower your interest rates. A credit counseling service will not affect your credit core as dramatically as a debt settlement company will.