What Are Debt Relief Services, And Should You Use Them?

Choosing the best credit card debt settlement companies can be tricky. Most offer highly competitive rates and services, but they charge about 20-25% of the debt as professional fees. They also take a client with debt amounting to $10,000 or more, although the National Debt Relief will accept clients with at least $7,500 unpaid debt. 

Despite the fees, consumers have reported savings of up to 30%. Take note also that tons of debt settlement companies run scams. They trick the borrower into depositing monthly payments in an unsecured account and ask them to stop making any payments to their creditors. 

Be wary of such illegal actions and report any suspicious companies to the FTC (call 1-800-328-4357) or the local authorities. Before you negotiate a debt settlement, you should first understand the pros and cons of credit card debt settlement and decide with your eyes wide open. 

How To Negotiate A Credit Card Debt Settlement

Debt relief refers to strategies designed to make paying off debt more manageable. Debt relief services cover a wide range of options. The umbrella includes debt consolidation, debt management, and debt settlement. 

They involve reducing interest charges, changing payment terms, reducing the principal amount, refinancing, consolidating debt, and forgiving portions of the debt. Bankruptcy is the final option for debt relief. Although, before you consider either a Chapter 7 or Chapter 13 bankruptcy, you should exhaust all debt relief options first. 

When it comes to having credit card debt, debt settlement is the standard course of action when debt consolidation or debt management has failed. You should negotiate credit card debt settlement when you’re way behind your payments, especially if your account has entered collections. 

If you are just starting to struggle with credit card payments, but your payments are on time, consider other debt-relief options first because credit card debt settlement negatively affects your credit score. When looking for the best credit card debt settlement companies, you need to consider the following:

1. A reputable debt relief company will offer free consultations. 

This is a great way to get to know the company and see if they are a good fit for you. You should feel at ease with the debt settlement company, especially since they will represent you during negotiations. 

2. Licensed debt companies will not charge upfront fees.

 Any company that asks for upfront fees is likely a scam. Legitimate debt companies may also ask you to make monthly payments to an escrow-like account so that when you have enough for a lump sum payment, they can begin negotiations.  

3. Legitimate companies will have a good Better Business Bureau rating.

This rating lets you know how other consumers have rated the company. Check for further business registration details and research their reputation as debt relief companies. 

Doing your research ahead of time can help you avoid scams and find a truly reputable company that can help you get out of debt.

How Does Credit Card Settlement Affect Taxes?

Any forgiven debt is considered taxable income and, as a result, subject to income tax. You are required by law to report this as a gain and pay the necessary taxes. Otherwise, you may face tax penalties which can hurt your financial standing. 

Debt settlement companies are also taxable and required by law to report their earnings. However, this method remains a cheaper option than bankruptcy despite the taxes and fees associated with credit card settlement. 

When you file for bankruptcy, you’re required to pay for legal fees as well as liquidate portions of your assets, depending on the type of bankruptcy you’re filing for. If you want to avoid paying taxes altogether, pursue other debt-relief options where you still pay for the entire amount owed. Negotiate on different factors like interest, penalties, and terms.

Is A Credit Card Settlement Bad?

A credit card settlement may be worth pursuing if you have no other options except bankruptcy. Even though a settlement can damage your credit score, your score is likely already low enough that it cannot be damaged any further. Credit scores decline when debts are not paid on time. 

The credit card settlement can be beneficial if you are committed to stopping the accumulation of new credit card debt and can commit to a repayment plan. After the settlement, you can rebuild your credit score and become eligible again for better loan terms and competitive interest rates. 

For more articles on managing credit card debt, check out Processing Card’s blog.

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