Credit Card Debt Settlement And Debt Consolidation

Credit card debt settlement and debt consolidation are two different ways for eliminating consumer debts. Settlement is where an agreement is made with an individual credit card issuer and consolidation deals with all of your debts. Which one you choose is a matter of what makes the most sense for you.

Settling Credit Card Debts

Missing payments on your credit cards sends warning flags to the card issuer. The bank may become concerned that you're at the point of filing for bankruptcy and may be willing to settle the amount. At this point, you can negotiate a lump sum amount that's less than what you owe and clear up the account. Expect to pay anywhere from .10 to .65 on the dollar after negotiating. While the process itself may sound simple, there are strings attached that must be paid attention to so they don't trip you up later on.

Issues That Arise From Settling Credit Card Debts

The major downside is that your credit rating will take a hit as the only way to get negotiate debts down is by not paying on all of the cards you own. Fortunately it's a short term problem that will eventually fade away. Bankruptcy will disrupt your credit for much longer.

Forgiven debt is taxable by the IRS. Say you owed $12000 on the credit card and settled for $6000. The $6000 that you negotiated away is now seen as income. You will receive what's known as a 1099-C by the card's bank that is reported to the IRS. The only way around this is to declare insolvency to the IRS so you don't pay taxes on it.

Debt Consolidation

This is a trickier way to reduce your debts. It's very appealing to have cards with no balance and one lump sum payment every month. Unfortunately, two issues come into view when considering this route.

Paying More Interest Over Time

A consolidation loan can have higher interest rates than your cards. Over time more money will be spent servicing the loan via interest as opposed to paying down the card with the highest APR first. Do the math on the cards APRs before taking this step. And if the decision has been made to go this route, shop around for the lowest rate possible.

Changing Spending Habits

Resist the temptation to use the credit cards once they are clear of debt. It's one thing to use a card for a small amount every month when you don't have cash at hand. It's another thing entirely to go back to old habits and start financing large purchases on the cards and carrying a balance again. You'll have completely annulled your reasons for eliminating your debt and put yourself right back where you started from.

Legal Assistance

Consult with a lawyer who specializes in debt reduction. They will be able to put you in a better negotiating position with the credit card issuers and get you the lowest settlement possible. Retainer costs will be minimal compared to the amount that an experienced attorney can save you interest and fees.

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