Monday, August 8, 2022

Should You Settle Credit Card Debt

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Settling With Your Credit Card Company

Can You Settle Credit Card Debt If You Are Still Current?

Interested in settling with your credit card company?

During your call with your creditors, theres no harm in offering to pay off some of your debt.

If you do speak with your creditors, you should ask the credit card company if theyll forgive the remainder and forget about the lawsuit.

It doesnt hurt to ask to be held blameless as well.

Thats because its one of the only ways to avoid your credit score getting impacted.

What should you do if your credit card company agrees to your settlement?

If thats the case, then youll have nothing to fear because your lawsuit will officially be closed.

Of course, youll want to have written confirmation that this was a settlement instead of a payment as well.

Next, take a close look at your debt.

If you find a lot of late fees and penalties, then you might be able to talk your creditor into forgiving them.

At this point, it would be wise to read your contract to see which payments can legally be added too.

Dont know what the difference is between debt management and debt settlement?

We highly recommend that you brush up on these terms before you deal with your creditor!

Debt Settlement Companies: Not Transparent About Fees And Tax Liability

There are reputable debt settlement companies out there. But the industrys chicanery and obfuscation prompted the Federal Trade Commission to crack down in 2010 when it issued the Final Rule for debt relief companies.

It ruled that debt settlement companies that sell their services over the phone cant charge a fee before they settle or reduce a customers unsecured debt. Within weeks, customers complained that debt settlement companies had switched to texting them in attempts to skirt the phone-call restrictions.

Another thing debt settlement companies dont advertise is the IRS factor. The forgiven debt is considered income. So if youre in the 30% tax bracket, the tax bill on a $15,600 reduction would be $4,680.

Add that to the late fees and debt settlement fees, and your total savings on a $30,000 case dwindles substantially. Then there is the effect debt settlement has on your .

Lenders are still reporting late payments or missed payments to the three credit bureaus, while the debt settlement company is trying to argue your case for a lower settlement. Those are monthly body blows to your credit score.

Debt settlement typically ends up taking 60 to 100 points off your score. That means youll be subjected to higher interest rates on loans, assuming lenders will give you a loan at all.

Negotiating And Settling A Credit Card Debt When Youre Being Sued By A Collection Attorney Representing A Debt Buyer Is Different

Debt buyers buy defaulted accounts in bulk from credit card issuers. They pay different amounts for the legal rights to the debts they buy. The fresher the debt the higher the purchase price. As defaulted credit card debts age, the less it costs to buy them. Credit card debts that get charged off by your original creditor are often bought and resold several times. The cost to purchase debts that have already been sold once or twice will be much less than was paid originally.

Debt buyers invest in unpaid debts and are taking a risk that they can get troubled credit card borrowers to pay up. Debt buyer collection has proven to be profitable. They dont get people to pay on all of the accounts they buy. Not by a long shot. They only need to collect enough money on the portfolio to cover the cost of the purchase, the overhead to collect, and meet projected portfolio profits.

Debt buyers settle credit card debts they own for less than the total you owe on the account. They will either collect debts using in house debt collectors, assign accounts to a subsidiary collection agency, hire another debt collection firm, or place accounts with attorney debt collection law firms they have relationships with.

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Negotiate A Settlement For Your Amount Of Debt

There are a few different paths you can take to negotiate your credit card debt. No matter which method you choose, make sure to evaluate your own budget first. What kind of payment plan could you afford? Could you manage to pay off the full amount in a lump sum payment? If you choose monthly payments, how much could you reasonably fit into your budget?

When Card Debt Is Reported As Charge

Should You Pay off Debt or Save?

Once a charged-off debt has been settled, the creditor will typically begin reporting the account to the credit bureaus as having been settled for less than the full amount due.

And just as the score sees a charge-off as a derogatory event, it also sees a settled account in the same way, despite the debt having essentially been wiped out.

As you may already know about credit scoring, the length of time since an account encountered payment problems can be one of the most critical negative factors in a credit score. That is, a recent negative item can be expected to cause much more score damage than an older one.

This is why scores tend to improve over time once problems have been resolved.

So, when a card goes from being reported as a charge-off to being settled, though the outcome is better, the more recent settlement date on the negative item can lead to a lower score than it was prior to settling, as part of the time since the most recent delinquency calculations.

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Extrajudicial Settlement With Agreement

When you say extrajudicial, youre referring to a resolution made between the defendant and the plaintiff without involving the courts. In other words, this kind of settlement is a more peaceful, convenient, and less costly way of compromise.

However, since the courts have no involvement, there will be a to tell how you will pay your outstanding debt. In an extrajudicial settlement, you have the following options:

1. Full Payment

Paying your debt in full is the best option to take this case off your shoulders. However, if you dont have enough money to pay in full, you may consider other options below.

2. Negotiation of an Affordable Payment Schedule

If youre employed, but your income is just enough for your necessities, you can ask the creditor to give you a longer payment schedule with small installments. You should also try to negotiate a little or no interest rate to keep the outstanding balance bearable.

3. Debt Restructuring

Restructuring your debt is the only practical way if there are no more other options left on how to settle credit card debt when a lawsuit has been filed. Creditors dont want this option, but theyll have no choice if you can prove to them that you cant pay the full amount.

In debt restructuring, you can renegotiate the payment terms by extending the payment period, reducing interest costs, or a partial condonation of the debt. This option is the hardest one to pull off. But with a good lawyer, you can increase the odds of success in this.

Different Ways To Settle A Debt After Being Served

The rule is not to immediately pay the debt after receiving your court summons. But, you can settle your debt as you face the case head-on. There are two ways to settle a debt while the case is going on.

You can settle it extrajudicially or judicially, depending on the facts and circumstances surrounding the case. Here are the ways to pay your debt:

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Acknowledge The Credit Card Problem

The first thing to do is acknowledging the problem that you are in a credit card debt and not to hide your head in the sand like ostriches. Avoiding a problem will not make it go away. When you get your credit card statement, the first thing that you need to do is to calculate the outstanding amount that needs to be paid. Talk to the issuer and check if the repayment term can be relaxed. The lenders hate to let go of their customers and will find a way to help clear off your credit card bill. They will hate to lose you to their competitors and hence will find a way out for you.

Debt Settlement Strategies And Risks

must you STOP making payments to settle credit card debt?

Ironically, consumers who enroll in a debt settlement program because they cant manage their debt burdensbut who have still been making payments, even sporadic oneshave less negotiating power than those who have made no payments. So their first step must be to stop making payments altogether. Credit scores can suffer during the debt settlement process, particularly at the beginning, says Sean Fox, co-president of Freedom Debt Relief. As the consumer begins to make payments on settled debt, credit scores typically will recover over time.

Becoming delinquent on debt and settling the debt for less than you owe can have a severe impact on your credit scorelikely sending it into the mid-500s, which is considered poor. The higher your score before you fall behind, the larger the drop. Late payments may remain on your for up to seven years.

Making no payments also means accumulating late fees and interest, which add to your balance and will make it harder to pay off your debt if you cant settle. Consumers can expect harassing debt collection phone calls once they become delinquent. Creditors might also decide to sue consumers for debts above $5,000debts that are worth their trouble, in other wordswhich can result in wage garnishment. The more money you have available to settle, the sooner you can resolve the debt. The longer your debt goes unpaid, the greater the risk of being sued, Detweiler says.

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Offer A Lump Sum Settlement

If you have access to a good amount of cash, or can put it together fairly quickly, you can try to negotiate a settlement with the credit card company in three payments or less . Sometimes your credit card issuer will reduce your debt to the principal you owe. For example, lets say you have a credit limit of $9,000, but with interest, fees and penalties, your current balance is $12,000. You may be able to negotiate so that you pay just three installments of $3,000. The other $3,000 you owe will be forgiven.

Why Debt Settlement Can Ding Your Credit Score

Why should it have a negative impact, when you’re lightening the load of your obligations and your creditors are getting some money? Because strong credit scores are designed to reward those accounts that have been paid on time according to the original before they’re closed.

A debt settlement planin which you agree to pay back a portion of your outstanding debtmodifies or negates the original credit agreement. When the lender closes the account due to a modification to the original contract , your score gets dinged. Other lenders are likely to take notice and be warier about granting credit to you in the future, too.

Still, it is possible that the reduced debt burden is worth a subsequent drop in your credit score. The high and late or missed payments have likely already lowered it somewhat. If debt settlement jump-starts your path toward a sounder financial future, it should be considered.

Let’s examine the process in more detail.

Will Paying Off Old Debt Boost Your Credit Score?

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Should I Pay The Debt To Dismiss The Lawsuit

No, and dont try to settle it.

When the creditor files a lawsuit, paying your debt wont make the case go away. According to , settling your debt after being served does more harm than good. Here are the reasons why:

  • It resets the statutes of limitations .
  • It makes your position weak.
  • Youll have no opportunity to reach a favorable settlement plan.

However, you might ask, can I pay debt before court date?

Again, its a BIG NO. Once the creditor files a case, youll have no choice but to go with the flow. You should cooperate with the Courts requirements and attend all hearings.

The creditor, being the plaintiff, will pay the filing fee and include it to the amount demanded. So if you owe $10,000 and the creditor pays $500 court fees, the plaintiff will ask the court to grant them $10,500 should they win the case.

If youre worried about wage garnishment and asset seizures, the creditor cannot collect your wage or seize your assets unless they win the case. As the case is progressing, the creditor cannot enforce you to give up personal or real properties to settle your debt. Moreover, they cannot order your employer to withhold a portion of your salary to pay off the debt.

Should You Settle Credit Card Debt Contact Us For Help & Information

Should You Pay Off All Your Credit Card Debt When You ...

So this begs the question, should you settle credit card debt? The answer is, it depends. Credit card settlement is one form of debt relief there are, however, a number of other options and solutions to consider before you decide that a settlement is right for you and your long term financial goals.

Contact us to find out about settlements, debt repayment programs, and alternatives to bankruptcy. Through our anonymous online chat or were available to answer your questions and provide guidance and information to help you make an informed decision about how to best handle your situation. Or book a free, confidential appointment with a professional credit counsellor to review all of your options in detail by . You will sleep better and eliminate your worry knowing you have a plan to deal with your debts.

Speak with a non-profit credit counsellor.

Debt settlements are just one of 7 debt relief options available in Canada . Before deciding to pursue a specific option, it would be wise to speak with a credit counsellor, review your situation, and determine which option is going to help you achieve your financial goals. Speaking with our counsellors is always free and confidential.

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When A Settlement May Be Better Than Consolidation

If you have credit card debt to repay and minimum payments arent working, you generally have two options :

  • Debt consolidation
  • Debt settlement
  • A settlement is usually the better option when you simply want the fastest exit possible without declaring bankruptcy and dont care about credit score damage. Its especially useful for debts that are already charged off. That typically happens after six-nine months of nonpayment. The creditor freezes the account, moves it to charge-off status and counts it as a loss for the company. They either sell it to an outside debt collection agency or send it to their in-house collections department.

    At this point, in either case, all interest charges and late fees on the account freeze. Federal law says that a creditor or collector cannot apply interest charges or additional late fees to a charged-off balance. They can only collect the amount listed when the account was charged off.

    This means that theres less benefit to consolidating the debt. The biggest advantage of is to reduce or eliminate the interest rate applied to each debt. If no new interest charges can be applied and rates dont matter, then consolidation offers less of a benefit.

    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.

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    Additional Accommodations For Debt During Covid

    If you’re dealing with significant debt during the Coronavirus/Covid-19 pandemic, you may have a few additional options available for relief.

    First, if you’re able to anticipate that you’ll be unable to keep up with your debt before you actually start missing payments, reach out to your lenders and creditors and let them know about your situation. Many credit card companies and other lenders are offering additional accommodations for borrowers experiencing hardship during the pandemic. This might include allowing you to temporarily halt or lower your minimum payments or pause the interest gathering on your account.

    In order to receive these accommodations, it’s vital that you reach out to your lender proactively, before you begin missing payments. Additional accommodations will not begin automatically.

    Lenders are unable to offer accommodations for debt that’s already past due. So, if you’ve already missed one or more debt payments, or have a debt that’s in collections, be prepared to navigate the collection process as you would normally.

    You can find more information on dealing with debt during the Covid-19 pandemic via the Consumer Finance Protection Bureau.

    Your Credit Will Be Damaged For Seven Years

    Why You Should Never Settle A Credit Card Debt?

    When you negotiate with a creditor to accept less than what is owed, the creditor will generally report your account as settled for less than the full balance. This mark typically remains on your credit report for seven years from the date of settlement, unless you already had late payments on your account that were never brought current. Delinquent accounts can hurt your credit rating more than any other action on your report, excluding bankruptcy, foreclosure, and accounts closed for non-payment.

    A settlement reported to your credit can lead to a drop of as much as 10% in your score, depending upon your current rating and past credit behavior.

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