Every day, we hear about a friend who has resolved their credit card debt through a debt settlement. It can seem like a tempting proposition, but before taking this serious financial step, it is important to assess the options available and determine if this is the right choice for you. Only with a comprehensive understanding of what credit card settlement means, and what the consequences might entail, can you make an informed decision.
What Does It Entail?
Simply put, debt settlement is an approach to managing credit card debt. It typically involves an agreement between the debtor and their creditor, in which they concur on a reduced balance that will be paid in lieu of the full amount. While this plan sounds like a great deal for the debtor, it can be more complicated than it seems.
First and foremost, not everyone will qualify for debt settlement. The credit card companies typically require applicants to demonstrate that they are unable to pay in full before they will agree to such a plan. Unfortunately, this usually entails defaulting on payments, which will have a negative affect on your credit score—this blemish on your credit record will not be expunged for seven years.
Consequences of Debt Settlement
In addition to damaging your credit score, there are a number of other consequences that ought to be considered. In particular, it is important to remember that debt settlement does not erase the entire debt, rather, it lowers the payments. This means that a certain amount of money will still be owed after the settlement.
The forgiven amount can also be vulnerable to taxation. The difference between what you owe and what you pay will generally be taxed by the IRS as income. It is thus a path that should not be pursued unless you are entirely incapable of making your payments.