Credit Card Debt Settlement

If you have high credit card debt, you might be able to settle the debt for less than the full amount. But beware of the downsides to credit card debt settlement.

By , Contributing Author

If you're trying to free yourself from the burden of credit card debt, you have a several options available. If you lack the means to pay the debt in full over a reasonable amount of time but are unable or unwilling to file bankruptcy, debt settlement might be an option. Debt settlement involves making an offer to the credit card company to pay off the amount you owe for a lesser amount. If the creditor accepts, you'll need to pay the entire settlement amount upfront, in one lump sum.

You can handle the debt settlement negotiations on your owner or hire a debt settlement lawyer to help you. You should, however, avoid debt settlement companies.

How Credit Card Debt Settlement Works

To get the ball rolling, you (or your attorney) should contact the creditor and make an offer to settle the debt. A credit card company might accept a settlement if you're very delinquent on your payments. It's often less costly for a creditor to accept a lesser amount in settlement than it is to send the account to collections, file a lawsuit, obtain a judgment, and then try to collect on the judgment.

For help in crafting a settlement offer, get Nolo's eForm Offer to Settle Debt With a Reduced Lump Sum Payment.

Pros of Credit Card Debt Settlement

Debt settlement has the following benefits:

  • You're paying less overall on your debt in a much shorter amount of time. Paying the debt off immediately means paying no more interest, and settling means you're paying even less than you currently owe.
  • Debt settlement is less harmful to your credit than bankruptcy if your credit isn't already poor.

Drawbacks to Credit Card Debt Settlement

On the other hand, debt settlement also has multiple drawbacks.

Debt Settlement Is Risky

If you stop making your credit card payments in an effort to save up enough money to offer a settlement, your credit card company can sue you, obtain a judgment, and garnish your wages and bank accounts. Even if you notify the creditor of your intent to settle, nothing legally stops the creditor from collecting.

Using a Debt Settlement Company Is Even Riskier

Many debt settlement companies will advise you to default on your credit card payments and instead pay the money to them. After taking a monthly fee, they'll put the rest of your payments into an account to accumulate a lump sum large enough to offer the credit card company. Hundreds of fraudulent debt settlement companies exist, and it can be very easy to get pulled in by a debt settlement scam. The for-profit companies that offer debt settlement services often provide little or no help after you've agreed to pay them. And you might get sued.

Even if a debt settlement company assists you, you'll be paying a lot for services you could do yourself or would be better off paying to an attorney.

Debt Settlement Might Create Income Tax Liability

When a credit card company forgives debt, the IRS and your state government might perceive the debt forgiveness as income to you. If the difference between your original balance and the settlement amount is considered taxable income, and you'll have to pay taxes on it unless you qualify for an exception or exclusion.

Getting Help

Generally, most people can work out settlements with their credit card companies without getting assistance. But if you need help handling the negotiations, consider hiring a debt settlement lawyer.

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