The Implications Of Credit Card Debt Settlements

May 2nd, 2009

debtsettlementCan’t handle your mounting credit card debt?  Instead of defaulting on your payments and getting the brunt of harassment from collectors, you may want to consider finding a way to settle the debt amicably.  There are a number of options available that you can work out either with your credit card company or through a third-party counselor.

When you decide to come to a debt settlement agreement, you have to realize this has several implications, including:

1. Lost credit line. Any time you go into a debt settlement program, the credit card issuer will close your credit account permanently.  While that’s not so bad (since you can’t use it neck deep in debt, anyway), it will have implications on your credit rating.

2. Credit scores. We do know that closing a credit line will lower your score a bit, but it’s possible that a closure due to debt settlement might hurt your credit report even more.  It’s better than both a bankruptcy and a defaulted account, though, so it’s the lesser of available evils.

3. Tax implications. If you were able to negotiate paying for a lower balance than what you actually owe, the amount you saved may need to be reported as income to the IRS.  According to some tax experts, any savings beyond $600 will need to be reported as income.   If you are insolvent at the time of the settlement, though, then the money need not be declared as income, though you’ll have to be ready with accompanying documentation to prove it.

noel Posted in Credit Card Guides

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