Credit card debt settlement is the process of negotiating with credit card companies to accept less than the total amount of your balance. This option can understandably bring up a lot of concerns and questions for people.
Should I Work With a Debt Settlement Company?
Debt settlement companies are typically for-profit companies that negotiate on your behalf with creditors to reach an agreement on an amount you can pay and the timeline for making that payment in order to have the remainder of your balance forgiven.
Some debt settlement companies ask you to set aside a certain amount of money into an escrow account that they maintain control over, which can put even more burden on someone who already has trouble making payments on their credit card accounts. Many times, they will also charge upfront or monthly fees and have cancellation policies that can cause more problems.
Creditors are not obligated to negotiate, so it’s possible that even if you follow the policy of the debt settlement company, you may not have all of your debts settled. Should you choose to work with a debt settlement company, utilize options for free consultations and ask questions about their process.
PCS Debt Relief doesn’t charge any upfront or monthly fees—we only get paid if you get debt relief. We also have no early cancellation policies or forced escrow. We believe that each of our clients is responsible and competent enough to handle their own funds and we’re confident in our ability to make settlements on your behalf—so much so that we won’t make a dime if you don’t get relief.
What Process Can I Expect?
After a free consultation to review your financial situation, a good debt settlement company will create a Credit Card Debt Settlement Plan with you that will give you details about the anticipated reduction of your debt. Then, the analyst will negotiate with your credit card companies on your behalf to agree on a lower lump sum that you will pay within a specific period of time.
Here is an example of a settlement letter:
At PCS Debt Relief, the only fees you pay are after this lump sum is agreed upon by you and the creditor, and they are based on the amount the debt was reduced. Then, the rest of the balance will be “forgiven”, and you will be credit card debt-free. This process can take as little as 6 months to complete.
For example, if you owe a total balance of $20,000, it may be negotiated down to a lump sum of $8,000 which you would pay within an agreed amount of time. The remaining $12,000 would be forgiven.
Below is a list of estimates based on our past results:
What Are the Potential Consequences?
Many of our clients have had questions about how the debt settlement process will have an effect on their taxes owed and their credit score. When you make use of credit card debt settlements, the credit card companies may report the settled debt to the IRS to be considered taxable income.
However, if you are considered “insolvent”, you won’t owe taxes on this. Insolvency is when the total amount of debt that you owe is more than the total market value of your assets. For you to be in a situation where credit card debt settlement is the recommended option, you likely would qualify for insolvency, but it can be complex to determine so you would need to speak to a tax professional to be certain.
Settling credit card debt will cause your credit rating to take a hit, however, upon completion of the process, it will be much easier for you to recover your score. Since credit score is based on your debt-to-income ratio, eliminating that debt will increase your score in the long run.
Another concern that clients have is that they will have legal action taken against them by creditors. Only about 3-4% of our clients usually get to this point, and it’s typically when they don’t pay back their lump sum by the time agreed upon after settlement.
Remember, credit card companies would never agree to a settlement if they weren’t still making a profit. Many of our clients feel guilty about not paying their full balance, not realizing that years of making minimum payments has resulted in tons of profit for the creditor in interest. In most cases, settlement still offers the creditor a sizable profit while helping you avoid bankruptcy or further stress about debt.
If you have questions about the process of credit card debt settlement and whether it’s right for you, PCS Debt Relief can help with our debt relief services that are tailored to your needs. We understand the burdens and stress that debt creates, and we’re here to help you every step of the way. Call (636) 209-4481 for a free consultation to achieve financial stability.