The Ultimate Guide To Settling Credit Card Debt

You’re probably overwhelmed if you max out your credit cards and fall deeper into debt. So how will you ever pay down the debt? This ultimate guide to settling credit card debt will get you on the right track.

Table of contents

What are debt settlement companies?

Many for-profit companies offer debt settlement programs. The company negotiates with your creditors to get you to pay a lump sum amount (the “settlement”) to resolve your debt.

Debt settlement companies typically ask you to transfer the monthly amount into an escrow-like account until you save enough money to make a final settlement.

In addition, these programs frequently instruct or encourage their clients to cease making payments to their creditors every month.

What are the risks involved in debt settlement?

Consider the risks before signing up for a debt settlement program, which may be able to settle most or all of your debts.

Many debt settlement programs require you to deposit money in a specific savings account for 36 months before settling your debts. Unfortunately, many people cannot maintain the payments long enough to pay off all (or even some) of their debts. As a result, they withdraw from the program.

Therefore, before you sign up for a debt settlement program, you should carefully assess your budget to ensure that you can allocate the required monthly payments over the entire duration of the program.

Even if you set aside the required monthly amounts a debt settlement company needs, there is still a chance that your creditors will not agree to negotiate a settlement amount. Therefore, your debt settlement company may only be able to negotiate some of your debts, even if you pay them.

In addition, debt settlement companies typically negotiate smaller debts first, leaving interest and fees on more significant debts to accumulate.

Debt settlement programs frequently ask or encourage you to cease paying your creditors directly, which may negatively affect your credit report or other issues. You might still be charged late fees or penalties, which will cause you to sink deeper into debt.

Creditors or debt collectors may also seek repayment from you. You might be sued for repayment, garnished wages, or lose your home if creditors win a lawsuit.

How do I know if a debt settlement is a scam?

Some debt relief firms may be deceptive and fail to deliver on their promises. For example, before they have settled any of your debts, some other firms may attempt to charge you for their services. Charging you a fee before they settle your debt is against the law.

In addition, other organizations may not inform you of the risks associated with their plans, such as the likelihood that the majority of (or all) consumers drop out without settling their debts, that credit scores might decrease, or that debt collectors will continue to contact you.

How do I choose a debt settlement firm wisely?

You are spending a lot of money on a big decision that affects your future. You can check with your state attorney general to see if any consumers have lodged complaints against the firm you are considering doing business with. Check whether the company is licensed to operate in your state if it is required.

Be sure to google the company name plus the word “complaints.” Then, learn about the company from others, including news about potential lawsuits with state or federal regulators for unfair or deceptive practices.

Know your debt settlement company fees.

An independent third party may maintain a dedicated bank account if you use a debt settlement company. You are entitled to receive interest on the money you deposit. Account administrators may charge you a reasonable fee for maintaining your account. However, they are responsible for paying your creditors and debt settlement company using money from your account when a settlement occurs.

A debt consolidation firm can only charge a portion of its fee if it negotiates a deal with one of your creditors.

For example, if a debt negotiation company settles one of your debts, it may only charge you a portion of its total fee at that time because it still needs to settle the other debts. However, whenever the debt negotiation company negotiates a debt settlement, it may charge you another portion of its total fee.

Therefore, the firm must inform you of the percentage you save and the estimated dollar amount it represents if the company charges a percentage of the amount you save through the settlement. This practice is often called a “contingency” fee.

How does debt settlement affect my taxes?

Your debt relief service may report any savings you receive to the IRS, which views it as income and taxable.

However, the IRS will not recognize any debt as settled if you are insolvent, a term that describes when your liabilities exceed your assets’ fair market value.

It can be challenging to determine whether you are insolvent. If you are still deciding whether you qualify for this exception, consult a tax professional.

Are there other options than a debt settlement firm?

There are several ways to tackle your debt besides hiring a debt settlement company. You can:

  • Negotiate directly with your credit card company.
  • Work with a credit counselor.
  • Consider bankruptcy.

Negotiating directly with your credit card company.

Even if your credit card company has denied you in the past, you should still speak with them. You can get in touch with your creditor yourself without having to pay someone else to do so.

Make things clear and persistent to your creditor, and keep good records of your debts.

You must explain your predicament when you talk to your credit card company. Your goal is to reduce your payments to a level you can afford by establishing a new payment plan.

Creditors will write off your debt if you fail to pay for 180 days which will cause your credit score to be damaged. And you will still be obligated to pay.

However, creditors are often ready to negotiate with you even after a debt is written off.

Work with a credit counselor.

Reputable credit counseling organizations can help you create a budget, manage your money and debts, and provide free financial education materials and programs.

Consumer credit, money, debt management, and budgeting are among the subjects their counselors teach.

In addition, the counselor will discuss your financial situation and assist in developing a strategy to address your financial concerns. Initial sessions are typically one hour in length, with follow-up sessions available.

Most respectable credit counselors operate through local offices, online, or by telephone. Find an institution that provides in-person counseling. Universities, credit unions, and U.S. Cooperative Extension Service branches operate non-profit credit counseling programs.

Credit card issuers must include a toll-free telephone number on their statements that connects cardholders to non-profit counseling organizations.

Check the U.S. Trustee list of approved organizations if a credit counseling company claims to be government-approved.

Your financial institution, local consumer protection authority, and friends and family may all be excellent sources of information and referrals.

However, non-profit status does not guarantee that services are free, affordable, or reputable. Credit counseling organizations may charge high fees or urge their clients to make “voluntary” contributions, which can cause even more debt.

Consider Bankruptcy.

The consequences of declaring bankruptcy are substantial, including a low credit score, but bankruptcy counselors and other experts say that sometimes it may be the most sensible choice.

Individuals with a regular income may retain mortgaged houses or automobiles through Chapter 13 bankruptcy instead of losing them through Chapter 7 bankruptcy.

After the court agrees to a repayment plan that lasts three to five years and allows you to repay your debts without giving up any property, you will be able to eliminate your debts.

As part of the Chapter 13 procedure, you must get credit counseling from a government-approved organization before filing for bankruptcy. A lawyer is required, and you will be able to receive bankruptcy relief after you have completed all your payments.

In addition, the Chapter 7 bankruptcy process requires you to pass a ‘means test.’

To be eligible for this form of bankruptcy, you must demonstrate that you have little or no income. The U.S. Trustee Program administers this test, and the amount varies from state to state.

The filing fees are several hundred dollars. Attorney fees are extra and depend on the situation.

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