How Does A Credit Card Settlement Affect Your Taxes

When you have more debt than you can pay, you may want to consider a credit card debt forgiveness settlement. While it can’t erase all of your debt, it can remove portions, so you end up paying less than what you owe. This article will discuss how to negotiate a settlement with credit card companies and the pros and cons of doing so. 


What Is A Settlement On A Credit Card?

Settlements are often the last resort after other debt relief methods have failed. It involves negotiating with your creditors for a lower sum - usually 40% - 60% of the original debt amount. You must make a lump sum payment or monthly installments until the credit card settlement amount is covered. 

Remember that a settlement stays on your credit record for seven years. During this time, your credit rating remains poor, and you’ll have difficulty accessing other types of loans like mortgage or business loans. If you qualify for one, you will end up paying higher interest rates. 

However, since it can provide significant debt relief, many financially challenged individuals still consider this route. They reckon that since their credit score is already poor, a settlement couldn’t hurt them further. 

The credit card company that forgives more than $600 of the principal amount must submit Form 1099-C to the IRS. You will also receive a copy of this form and be expected to include the amount in your income tax return. The IRS views a forgiven debt as an additional income, and any written-off or settled debt is a taxable income.

There are two ways to approach an American Express credit card debt settlement. You can work with debt settlement companies or try a DIY credit card settlement. The latter is relatively easy to do, and with a bit of research, it would save you extra from all the service fees debt settlement companies may charge. 

How To Negotiate A Debt Settlement With Credit Card Companies

Before negotiating a debt settlement, ensure you have a complete picture of all your loans. Determine how much you owe and who your creditors are. If you have multiple debts you want to settle, you need to draw up a strategy and determine who you’ll approach first. 

Make sure you have exhausted all debt relief methods such as debt management and credit counseling before attempting a debt settlement. Unsecured credit card debt settlement is the final straw before declaring bankruptcy, so ensure you’ve tried other methods. 

Before attempting a settlement, you must have enough cash to pay the lump sum. Alternatively, if you negotiate for monthly installment, you must be fully committed to meeting those payments. 

If you are still accumulating debt and are not fully committed to paying off any settled amount, don’t attempt a debt settlement because not following the settlement terms can further damage your credit rating. 

Here are the steps you need to follow in negotiating a debt settlement with credit card companies:

  1. Call the customer hotline and ask to speak with a representative in the collections department. 
  2. Explain your situation truthfully and ask for a debt settlement. 
  3. When granted permission, start the negotiation process in writing by sending the negotiated amount through a formal letter. 
  4. Negotiate for 40-50% of the total debt. It will give you room for negotiations as creditors attempt to collect as much as possible. 
  5. Have cash ready to pay any lump sum amount. Most creditors will agree to the settlement offer if you already have the lump sum amount ready.
  6. Document all the settlement terms to protect yourself in the future in case the card issuer changes some words. 

Be persistent but patient when handling credit card debt settlements. Negotiations require a lot of patience. If you're not comfortable negotiating on your own, you can hire the services of a debt settlement company to argue your case.

Does Credit Card Debt Settlement Work?

For many stressed-out borrowers, credit card debt settlement is a lifesaver, and it allows them to get out of debt and begin the long process of rebuilding their credit score. There are many reasons you can get into more debt than you can afford to pay, and some are uncontrollable factors, while others are just bad spending habits. Whatever your reasons are, having a debt settlement strategy to fall back on can be somewhat comforting. While not the most ideal scenario, it is still a way to consider. For more articles about credit card debt management, check out our resources to help you manage finances and think about credit card payments at Processing Card.

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