Should You Settle Credit Card Debt
When your credit card balances are more than you can handle, you may be wondering whether you should try to settle credit card debt with a debt collection settlement agency or find some other way to resolve your financial troubles.
What is credit card settlement? As a form of debt settlement, is a debt relief strategy that seeks to get creditors to settle credit card debt by offering a one-time payment that is less than the total amount you owe. When you begin process, you will stop making your monthly payments to credit card companies and will instead put money in a savings account with a debt settlement agency. As your back-owed payments begin to add up, credit card companies may fear that you wont be able to pay anything on your debt, making them potentially more willing to accept a settlement offer. After several months, your settlement agency will approach your creditors to offer to settle credit card debt with a lump sum payment from the money you have been putting in your savings account.
How Is Debt Settlement Different From Other Debt Relief Options
If you make a quick search online on how to negotiate a debt settlement, you will find other terms such as debt management, debt consolidation, payment assistance, or workout agreements. Take note that these are all different from what a debt settlement is because while they may offer you some relief, they do not significantly reduce your debt like how a debt settlement will.
However, these debt relief methods are also valid options in case you are not granted a debt settlement. These options will be discussed later in the article.
If You’re In A Temporary Bind
Considering that the process of debt settlement is a last resort, first consider credit cards that offer no interest and help you pay off your debt. Most balance transfer cards require applicants to have a good credit score to qualify, but they can help you pay off your principal without worrying about interest charges. Just make sure you pay off your balance before the intro period ends. Some of our favorite zero-interest credit cards that offer balance transfers include the Citi Simplicity® Card, the U.S. Bank Visa® Platinum Card and the Wells Fargo Platinum card.
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Here is an example. Joan Smith, like many Canadians, deals with only one bank, the ABC Bank, where she has one bank account. She obtained her VISA, her only credit card, through ABC Bank. Furthermore, she has her paycheque and her government baby bonus payments direct-deposited into her bank account at this same bank.
Joan pays her rent and her car monthly car insurance using a Pre-Authorized Debit on her bank account at ABC Bank. She also pays a number of monthly utilities cable television, internet, and cell phone bills using a Pre-Authorized Debit on her ABC Bank VISA, which has a $10,000 limit. She currently has $800 in her bank account at ABC Bank, enough to cover next months rent. This month, her minimum monthly payment on her ABC Bank VISA is $200. She cannot afford to make this payment because she needs to pay her rent as well as some unanticipated car repairs.
Your Debt Balances Will Balloon Over The Next Few Years
As mentioned above, the first thing a debt settlement company will ask you to do is send a no contact letter to your creditors to cease all contact with you. Debt settlement companies are highly unlikely to tell you that your creditors, while not contacting you according to the Fair Debt Collection Practices Act, will likely continue to add penalty fees and eventually legal fees to your balances. In many cases, balances on consumer accounts will increase by 50% or even 100% within just a year or two due to penalty fees, penalty interest rates, or legal fees associated with the creditors actions to take the consumer to court.
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Debt Settlement Taxes And How To Avoid Them
When you settle a debt for less than the full amount that you owe, you could be subject to income taxes. Any principal that you do not pay back is considered canceled debt. The IRS treats canceled debt as a source of income its money you received without paying your creditors back. But that means that it counts as taxable income.
The good news is that there is a way to avoid paying taxes on canceled debt. All you need to do is show the IRS that the debt was canceled during a period of financial hardship.
A Federal Rule Prohibits Settlement Companies From Charging You A Cent Until After They Arrange A Settlement On Your Behalf
A 2010 federal rule prohibits debt settlement companies that acquire clients via telephone calls to charge their customers a fee until AFTER they have reached an acceptable settlement between the creditors and the consumer. If a settlement company begins to charge you a fee before offering any settlement service, they are likely in violation of this rule.
As a result of this rule, many settlement companies outsource their marketing activities as a way to get around the rule. By hiring third-party companies , they argued that they were not acquiring clients by income or outgoing phone calls but by referrals from other companies. In the fall of 2019, the Consumer Financial Protection Bureau engineered its own settlement with the countrys largest debt settlement company after charging it had violated the TSR.
As a savvy consumer, you should avoid working with any settlement company that requires you to pay fees before it provides you satisfactory service. Otherwise, it is very possible you are contracting with a fraudulent organization that will disappear into thin air, along with your money, after just three or four months.
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How Settling A Credit Card Debt Affects Your Credit Score
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In a Nutshell
Settling a credit card account will resolve your debt, but before you commit to this course of action, please read on to learn more about the negative impacts a debt settlement will have on your credit score, alternative debt-relief options, and how you can turn debt relief into a positive opportunity to rebuild your credit over time.
Written bythe Upsolve Team. Reviewed byAttorney Andrea Wimmer
If youâre considering entering into a debt settlement program to achieve a $0.00 balance and a clean slate, you should be aware of the negative effects that debt settlement will have on your credit score and future credit opportunities. Settling a credit card account for less than you owe will immediately resolve your debt, but you will then need to invest time into rebuilding your credit score.
You can rebuild your credit after settling debt, it will simply take some time and effort to do so. Before you commit to this course of action, please read on to learn more about the negative impacts a debt settlement will have on your credit score, alternative debt-relief options, and how you can turn debt relief into a positive opportunity to rebuild your credit over time.
Can Bankruptcy Clear Credit Card Debt
When you find yourself in a mountain of debt, declaring bankruptcy may be your best, if not your only, course of action. We feel like it is extremely important to know how declaring bankruptcy will affect your debt and your future. Talking to an experienced bankruptcy attorney is something you need to do before you make the decision to declare bankruptcy. There are certain kinds of debt that can be discharged and other kinds that cannot.
The bankruptcy code does not list what is dischargeable and what is not, but it does list what debt is non-dischargeable. In general terms, the following are some of the debts that are most often dischargeable when a bankruptcy is filed:
- utility bills
- payday loans
- unsecured loans like credit cards
The kind of credit card debt that will not be discharged when filing a Chapter 7 bankruptcy is when you charge a vacation to your credit card and a month later file for bankruptcy, charge large-ticket items that you couldnt possibly afford to pay back, go on shopping sprees that arent consistent with your spending prior to the spree, or any spending you do that may appear fraudulent.
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What Debt Settlement Companies Dont Want You To Know
In the early 2000s, this country witnessed an explosion in the growth of the debt settlement industry, along with a growth in complaints against it. Promising ultra-low pay-offs and preying on consumers fears and their distaste for big credit card companies, debt settlement companies rarely discuss or make clear the high probability of several very negative consequences of their work with debtors.
How To Settle A Credit Card Debt
If you are not careful, you might not be able to avoid a lawsuit. One of the most important things you can do in this regard is to never ignore a court summons if you receive one. Unless you are able to negotiate a settlement so that the lawsuit is withdrawn, you should file a response to the summons by the deadline. In the majority of cases, you are given 30 days to respond. Nevertheless, this is not the case everywhere, and some states will only provide you with a couple of weeks.
Keep in mind that if you dont respond in time, a default or automatic judgment can be placed against you. If this happens and a default judgment is issued against you, your creditor or debt collector will have the ability to garnish your wages, take money from your bank accounts, or even seize your property to pay off the debt. But if you remain organized and proactive, you can still avoid a lawsuit altogether and settle your debt. To do so, you will need to:
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Myth No : I Have To Pay Upfront For Debt Settlement And The Settlement Company Controls My Money
The truth: Not anymore.
Debt settlement companies that market their services are banned from collecting advance fees from consumers before settling or reducing a consumers credit card or other unsecured debt, according to a Federal Trade Commission rule that took effect in October 2010.
The rule also specifies that the consumers money set aside to pay debts be maintained in an account at an insured financial institution that the consumer owns the funds and any interest accrued that the debt settlement company does not own, control or have any affiliation with the company administering the account and that the provider does not exchange any referral fees with the company administering the account, the FTC says.
Also, consumers can withdraw from the debt relief service at any time without penalty and receive all unearned provider fees and savings within seven business days.
What Sort Of Debt Should I Settle
Since most creditors are unwilling to settle debts that are current and serviced with timely payments, you’re better off trying to work out a deal for older, seriously past-due debt, perhaps something that’s already been turned over to a collections department. It sounds counter-intuitive, but generally, your credit score drops less as you become more delinquent in your payments.
However, bear in mind that, if you have an outstanding debt that was sent to collectors more than three years ago, paying it off through a debt settlement could reactivate the debt and cause it to show as a current collection. Be sure to get this straight with your creditor before finalizing any agreement.
A debt settlement remains on your credit report for seven years.
As with all debts, larger balances have a proportionately larger impact on your credit score. If you are settling small accountsparticularly if you are current on other, bigger loansthen the impact of a debt settlement may be negligible. Also, settling multiple accounts hurts your score more than settling just one.
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Call Your Credit Card Company
Consumers can use a settlement company , or they can do it on their own, says Linda Jacob, a financial counselor with Consumer Credit of Des Moines. Theres no need to pay a company to settle for you. Save the fees and do the work yourself.
If youve decided to negotiate on your own behalf after weighing your options, its time to call your credit card company. First, ask for the department that handles debt settlements or collections. You may want to prepare a script beforehand, so that you know exactly how to frame your request.
Clearly and politely explain your financial situation and ask for exactly what you want. The initial answer may be no, but that doesnt mean you cant be persistent even if it takes multiple phone calls.
Document every conversation you have. Write down the names and job titles of anyone you speak to so you can reference them in follow-up calls if necessary.
You cant be afraid to ask for a supervisor or the supervisors supervisor, Sullivan says. The higher you go, the more likely you are to find someone who is willing to make a concession.
Paid In Full Accounts
Youre probably familiar with the terms paid in full and settlement. Some people use these terms interchangeably, but they have different meanings.
A paid-in-full account means youve paid the entire amount owed and interest. If you had no missed payments, the paid-in-full account will remain on your credit report for 10 years. It will help improve your credit score, and it will show lenders that youre a responsible borrower. That will make you an appealing applicant if you decide to apply for a loan.
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Other Important Notes About Collection Agencies
- You may be able to take action to stop calls from collection agencies and in some instances, creditors, debt buyers and law firms
- A creditor can only assign your outstanding account to one collection agency at a time
- Some law firms in Canada operate in virtually the same manner as a collection agency
- If your debt remains unpaid for more than six months, a collection agency representing your creditor might be prepared to negotiate a one-time payment for less than one hundred per cent of the outstanding balance typically, the older your account the more approachable a creditor might be
Settling Debt For Less Than You Owe
If you cannot afford to pay off your credit card debt in full or manage minimum required payments, then the next option is to settle your debts for less than you owe. You pay a percentage of what you owe, and the creditor agrees to discharge the remaining balance.There are two ways to settle your debt:
The recommended method to settle debt is with a Consumer Proposal through a Licensed Insolvency Trustee. The trustee will determine how much of your debt you can reasonably afford to repay. Then they will set up a repayment plan. You make monthly payments to the trustee that they distribute to your creditors. Once you complete the payments, the remaining balances are discharged.With a debt settlement program, a private company will help you find a monthly payment you can afford. They keep those payments in an account until there is enough money to make settlement offers to your creditors. They offer your creditors a percentage of what you owe and if the creditor agrees, the money is paid out. Then the creditor discharges the remaining balance.
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Get The Agreement In Writing
No matter what agreement you ultimately reach, make sure you get the agreement in writing and stick to your payment plan. If you have more financial trouble, contact the creditor before you fall behind so you can renegotiate. If you wait until you default, the creditor might not be willing to renegotiate with you.
Many Debt Settlement Companies Will Push You To Take Out A Settlement Loan Within A Year To Settle Your Debts
Relatively recently, debt settlement companies have begun to act less like an advocate for their clients and more like a funnel to high-risk, high-fee lending institutions. Many debt settlement companies now push their clients away from the save for one to two years before we offer a settlement model toward companies that will make a debt consolidation loan to the consumer at interest rates as high or, more often, higher than the APRs on their original debts. These short-term loans typically carry terms of three to five years. These loans can easily put the consumer back into the situation of being unable to afford their monthly payment, leading to even more financial troubles in the future.
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Filing For Bankruptcy Vs Using A Debt Settlement Company
There are some similarities between filing for bankruptcy and using a debt settlement company, and some big differences. For example, there are fees involved with each.
Your credit will be affected whether you file for bankruptcy or use a debt settlement company. The bankruptcy filing will be a negative mark that may stay on your credit score for seven to ten years . Debt settlements should improve your creditworthiness. Too many outstanding balances will negatively affect your creditworthiness, because youre unlikely to be approved for any new loans. However, as your balances are resolved through debt settlement, your creditworthiness should steadily increase.
One issue with debt settlement companies is making sure that they are a reputable business and not a scam. You can be sure to avoid these issues with CuraDebt, just do a little research into our company to learn about our experience, rankings, and reviews.