Debt collectors are experts at locating assets and sources of income and using all of the collection tools at their disposal. These include letters, phone calls, court actions (liens, summons, wage garnishment, bank account levies), repossessions and more.
There is no government program to bail out credit card debtors and while you have the right to ask for a settlement, they have no obligation to give you anything but a hard time unless they want to.
You can try to settle a debt for less than you owe on your own. However, there are some consequences to consider before giving in to the temptation to settle.
First, your creditor is quite unlikely to settle for “something” as opposed to the full amount of what you owe until or unless your account is seriously past due (typically, more than 180 days without payment). An account that is more than 180 days late is a large negative on your credit history. Keep in mind that potential lenders viewing your credit history are interested in how well you have managed credit in the past because it is a fairly good indicator of how you will manage it in the future. Even one account on your credit report that is more than 90 days late will be a huge red flag to a lender. And, unless you bring the account current by making up those past due payments that negative notation will remain on your credit report for seven years.
One other consequence to your credit when settling a debt is that it is marked on your credit report as settled for less than was owed. This type of account is definitely not going to be received well by a potential lender. Would you lend a couple of thousand dollars to a friend knowing that the last time your friend borrowed money he or she only repaid less than half of what was borrowed?
You may be thinking that the hit to your credit would be worth it because you won’t need access to credit anytime in the near future. The trouble with planning for the future is that you don’t know what will happen. You may find that you will need credit in the next year for something that you had no way to predict would occur. Plus, don’t forget that credit reports are used by employers for promotion and hiring decisions, by insurance companies and by landlords. The list of noncredit users seems to continue to grow.
Lastly, forgiven debt (unpaid credit balances from a settlement) is considered income by the IRS. Any amount greater than $600 forgiven by a creditor will result in a 1099 tax form that must be added to your total income for tax purposes. The IRS, to collect taxes owed, can take your future tax refunds and bar you from government help such as subsidized student loans.
The bottom line is that if you can afford to make the payments, just do it.
Related Information in Prosperity News
- Debt Relief: Debt Settlement Companies Have High Fees – Better to Lawyer-Up
- Debt: Four Tips to Improve Your Credit Score
- Five Ways You Can Hurt Your Credit Score
- College Graduates: Tips to Establish Credit and Build a Good Credit Score and History
- Debt: Borrow Money to Build Your Credit History
- Bad Credit Derails Job Seekers
- Debt and Deleveraging – Severe Financial Crises Followed by Long Periods of Debt Reduction
- Credit Card Rules Change in February
