What You Should Know about Credit Card Debt Negotiation |
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by: Janna Weiss
If you've been overwhelmed by credit card debt, negotiation might sound like a great idea. But if you do decide to negotiate, prepare yourself for a long and bumpy road. You’ll probably have to make numerous phone calls to your credit card company, talk to endless managers, and agree to terms that are less than ideal. (Nobody ever said debt settlement was easy!) Before you begin, there are some things you should know.
Your credit score could plummet even more. When you first contact the credit card company to settle your debt, it’s likely that they’ll freeze your credit limit right away. If your cards are maxed out, that won’t matter so much. But if you’re well below your maximum credit limit, your credit score could fall as a result of the lower limit.
You might have to pay taxes. If you manage to negotiate a lower sum for your debt repayment, you might end up owing taxes on the portion of the debt that was forgiven. Whenever a lender forgives $600 or more of the principal, they file a 1099-C form with the IRS. This means that if you arrange a nice lump-sum payment at a discount, you’ll have to pay taxes on the difference. Note that this only applies to the principal, not to fees or interest rates that get waived.
Bad reports mean bad credit. Do you know how your bank will report your repayment efforts to the credit bureaus? Find this out before you agree to any arrangement. A partial debt settlement can be just as bad for your credit score as a total default. Also, if the bank reports partial payments, your credit score will suffer. As part of your deal, ensure that the bank will report your payments as on-time and in full. This is the stickiest issue surrounding debt negotiation, since you have very little influence over how the lender will handle the reporting.
What can you do if you need to negotiate your credit card debt? Experts recommend being honest about your financial situation and your desire to pay. Ask to have some of the debt forgiven, or ask for a lower interest rate so that more of your monthly payments go toward the principal. If you’re considering bankruptcy, let the creditor know; that might be the little shove they need to start working with you.
Most importantly, don’t make payments until you’ve got a written copy of the agreement. That way, you’ll have the terms clearly spelled out, and you’ll be able to produce the document in court if necessary.
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