In dire situations there are a few steps can be taken to settle credit card debt. Dire situations means extremely large amounts of credit card debt.
Caution: These steps may cause accounts to be closed, credit score to drop, owe additional income tax, or a higher interest rate!
-Debt Settlement: Offering a lump sum of less than you owe in return of easing the debt. This is NOT Debt Consolidation, which is not as hard on your credit score. Debt Settlement is serious and will hurt a credit score. The negotiation to pay and amount less than what is currently owed.
-Debt Management: Paying a counseling organization monthly, then they help negotiate terms and pay bills on your behalf. Choose wisely here because there are some bad guys in this field too.
-Hardship repayment or forbearance: This one is used when there is a divorce, job loss, or extreme financial hardship. Talk to a professional!
-Modified Payment Plan: Reducing your monthly payments by extending the time to pay. The interest rate will increase (which means you’ll pay more over time). You might be able to negotiate this one directly with your credit card company. Like hitting the pause button on student loans. Over time this will still hurt a credit score.
There are several drawbacks to going through with one of the options above.
- Negative Impact on Credit Score: The time involved with going through negotiations may take a long time causing several late fees, missed payments, and increased interest rates.
- Credit Report Affected: The fact that you settled your debt will remain on your credit report for several years.
- Fees: Using a company to assist with settling debt will cost you. This fee can be percentage of the debt. If the balance on the credit card is $15,000 then a 20% fee is $3,000. Is it worth it?
- No Deal: The creditor or lender may refuse to settle the account.
- Tax Time: Forgiven or settled debts are taxable.
Desperate measures for desperate times… be very cautions on who to use or what advice to follow when going down the debt settlement road.