Money is scarce and hard earned and therefore it is paramount that you make sure that you spend it wisely on your necessities only, save enough for the future, be tactful with your debts and retain a good financial health.
It is more important that you allocate your resources in a more efficient and productive way especially when you are opting for debt settlement to get rid of it.
The adverse consequences
There are a few adverse consequences that you may experience while negotiating for your credit card debt. It is, therefore, necessary that you take every step prudently knowing about these adverse consequences well in advance.
- High fees: If you choose to work with a debt settlement company to deal with your credit card company it will cost you a lot for such services. Their fees are usually high as these are typically structured as a percentage of the amount forgiven by your creditor or even worse on your overall debt. Their fees can range anywhere between 15 to 30 percent of the amount settled.
- Worsening credit: Your credit score will be damaged when you go for debt settlement plans with or without taking help of a debt settlement company. Your credit report will reflect the fact that you settled your debt and not that you paid a reduced amount after negotiation and your account has been closed. It will stay there for up to seven years dragging your score further down.
- Surprise taxes: When you settle your debt you will automatically involve the IRS. If you get a reduction on your debt for $600 or more, you will need to pay taxes on that saved amount usually. However, you may be able to reduce this tax liability provided that your liabilities exceed your assets. In such cases, you will need to consult a tax preparer to review the IRS Form 982 to determine whether or not you qualify to be insolvent.
- Amass the cash: Debt settlement means you will have to pay a lump sum to the creditor and this more often than not becomes a major roadblock for several consumers. If you cannot arrange for the money within the stipulated time limit which is short in most of the cases, you run into the risk of further damaging your credit score.
- Evidence: To get a debt settlement offer from your creditor you will need to provide proper evidence of your financial hardship and that the debt is out of control. However, there is a high chance that the creditor will not be willing to offer a settlement or to negotiate with you and demand a full payment.
- Bankruptcy: When a possibility of debt settlement is off the table you will now have to consider more damaging and drastic options to escape from your debt such as filing bankruptcy.
All these means that you will need to be well prepared for choosing debt settlement as an option which will only reduce your debt amount but not the consequences of failing payments. Read the debt settlement feedback and then make a decision. You may even consult with a debt advisor for that matter.
Consider the alternatives
There are a few alternatives to debt settlement that you may consider if you are not very confident about meeting with the requirements of debt settlement.
- You may know that each state follows a specific rule and statute of limitations when it comes to debt collection. If you do not pay for a credit card debt for many years and also exceed the statute of limitations, then the creditors or the collection agencies may not require or force you to pay legally. This is colloquially branded as ‘zombie debt.’
- Consider expediting debt repayment which is one of the best things you can do to pay off your debts more strategically. If you have enough resources to pay more than the monthly minimums after meeting with your budget requirements, make sure you design and implement a tried and tested debt repayment plan. This way you will lower your debt fast and also reduce the interest that you owe on your credit card debt to come out of it faster.
- Contact with your credit card company’s customer care representative and request to slash your interest rate. Sometimes it may not work and in such a case, it is better that you consider transferring the debts that carry a high rate of interest to a credit card that carries lower interest rates. You may even a new card that comes with a 0% promotional Annual Percentage Rate.
- You may also consider taking on a debt consolidation loan that is far less damaging to the credit score as compared to debt settlement arrangement.
- Hardship programs that are offered by most credit card companies but are unadvertised will also help you a lot in your debt free journey. These hardship programs come with reduced interest rates, minimal fees and most importantly with lower monthly payments. With such easy and improved terms it will be easy for you to get over and top of your debt. However, your account may be closed and your credit score may also suffer temporarily as well.
- You can explore several debt management programs with a debt counselor working with a nonprofit organization. If they are approved by The National Foundation for Credit Counseling you may have invaluable tips to coordinate a debt management program. The counselor will talk with your creditors to negotiate on the payment terms and time to reduce the interest rates and monthly minimums. You will then have to pay a lower and single monthly payment to the credit counseling service who in turn will distribute it amongst all your creditors.
Lastly and as your last straw, you may consider bankruptcy as an option. However, this is not the best viable option neither it is a cure for your situation. You may still have to make payments for a predetermined period while the bankruptcy will sit on your credit report for 10 long years damaging your creditworthiness severely.
