At Solvable, our #1 goal is to help you get into a better financial position through honestly, partnerships, community and doing things the right way. Some of the links in this post may be from our partners. Opinions are the author’s alone.
Plenty of TV ads and internet pop-ups tout the benefits of debt relief programs that can wipe out your credit card debt for good. While credit card debt relief programs do exist, qualifying can be difficult. If you can move forward with this type of plan, your credit score can be irrevocably damaged, making it difficult to obtain a mortgage or loan in the future. Here’s what you need to know about credit card debt relief programs and steps you should take if you’re struggling to pay off your debt.
If you have a high credit card balance and you’re behind on your payments, the credit card company will sell your debt to a collection agency. This company will pursue you in an attempt to collect the debt. They could even sue you for the past-due balance.
Alternatively, you can make an offer to settle the debt for a percentage of what you owe. Often, the collection agency will negotiate this type of settlement so the agency can receive partial payment rather than no payment. Your settlement offer can either be paid in installments or as a lump sum. You may even be able to negotiate with your credit card company directly if you contact them before they sell the debt.
However, the amount of debt forgiven by the collection agency will be considered income by the IRS. You will have to report the additional income on your tax return and pay taxes on the amount. The agency has a solvency test to determine whether you were considered insolvent before the debt was forgiven. If you do not meet the standards of the test, you will need to pay taxes on the difference between the forgiven debt and your insolvency amount.
If you had $10,000 in credit card debt before the settlement and only $7,000 in assets, your insolvency amount is $3,000. Let’s say the collection agency forgave half the debt ($5,000). This is $2,000 more than your insolvency amount so that $2,000 will be taxed as income. If you’re not sure how these guidelines affect you, consult your tax attorney before signing a debt relief agreement.
As soon as you are unable to make a minimum payment on your credit card account, call the hardship department of your credit card company. Although they are unlikely to agree to a debt settlement before you have even missed a payment, they may agree to waive late fees or interest for several months. This can give you time to catch up on your bills, ideally preventing damage to your credit score. The longer you wait to find a solution for overwhelming debt, the more you will hurt your credit and thus limit your options for resolving the situation.
Before negotiating with a credit card company or collection agency, know your rights when dealing with creditors. The Fair Debt Collection Practices Act establishes laws about how and when creditors can contact you and what they can do to attempt to collect the debt.
When negotiating with a collection agency, make sure you get any proposed plans or promises in writing. Do not make any payments to a collection agency until you have a signed legal document in place. For best results, have an attorney review the repayment plan to ensure that it is in your best interests and legally enforceable.
These companies can help you explore your options when it comes to resolving your debt. Many credit counseling firms are disreputable, so only work with an agency with accreditation through the National Foundation for Credit Counseling. A trustworthy agency will give you a free phone or online consultation about your debt relief options. Reaching out for this type of help will not damage your credit score.
The benefit of working with a counseling agency is the opportunity to create a budget that works for your financial situation and includes a reasonable, affordable plan to pay off debt. They will negotiate with your creditors for reduced balance amounts or interest rates, then establish a plan through which you pay off the debt within five years.
This type of debt relief is a good option if you can afford the monthly payments proposed by an NFCC-accredited firm. Make sure to account for start-up costs and ongoing fees, which should not be exorbitant if you are working with a trustworthy counselor.
Beware of companies that recommend you cease payments on your credit card accounts while they collect your payment amount. After your credit is already damaged, they will begin negotiating on your behalf. Not only is this method rarely effective, but many companies who employ this strategy are also untrustworthy.
Avoid any firm that charges high upfront fees, claims to be associated with a government debt relief program, or collects money from you without distributing it immediately to your creditors. Investigate a debt relief program with your state attorney general’s office to read about consumer complaints before deciding whether to sign on the dotted line.
If you speak with an accredited debt management company but are unable to make the proposed payments, bankruptcy may be a worthwhile option to consider. With Chapter 7 bankruptcy, your debts are eliminated if you qualify. This elimination includes unsecured debts like credit cards and medical bills, but not mortgages, tax debts, or student loans.
Chapter 13 bankruptcy reorganizes your debts and gives you an affordable payment plan that allows you to pay off your debt within three to five years. Although bankruptcy stays on your credit report for 10 years, having an account in collections is reported for seven years, and you will still be responsible for that debt.
Connect with vetted, trustworthy debt relief programs through Solvable. Answer a few simple questions about your credit card debt and we’ll recommend some counseling firms that can help you weigh your options and get on the path to getting out of debt.