What Happens After a Credit Card Debt Negotiation Settlement?

Going through a credit card debt negotiation settlement can be challenging. If you have never been through the process before, here are a few things to expect during and after the credit card debt negotiation process. 

The Process

This process usually begins when someone has a credit card debt that they cannot afford to pay. He or she lets the bill go past due and starts accumulating late fees. After a while, the person starts to get phone calls from the credit card company. Then the credit card company may even enlist the help of a collection agency. They often call the debtor repeatedly to try to come to a resolution. 

Eventually, the debtor talks to the credit card company and works out a settlement. During this phase, a negotiation takes place. The credit card company will typically come back with an offer that allows the debtor to settle the debt for less than the amount owed. For example, if the credit card balance was $4000, they might offer to take $2500 and close out the account. This can be very beneficial for those that have accumulated balances that they cannot afford to pay. 

General Terms and Conditions

While every credit card debt negotiation is a little different, there are certain things that are common. For example, you will not be able to buy anything with the card during this process or afterwards. The credit card company will agree to take a lesser amount of money as long as you agree to let them close out the account. 

In addition to that, there will be payment terms. The most common way to do a debt settlement is to use a lump sum of money to get rid of the debt. Many companies prefer to get a lump sum of cash and walk away from the arrangement. Others like to set you up on a payment plan and take slightly less than what is owed. However, generally, the more that you pay up front, the bigger reduction you will be able to get from the overall balance that was owed. 

Negative Impact

While this process can benefit you by allowing you to eliminate part of your debt, there are some negative impacts. For one thing, you will have to pay taxes on the amount of debt that was canceled. The company that canceled the debt will send you a 1099-C cancellation of debt tax document, and you will have to report this as income to the IRS. In other words, the money you initially saved with the cancellation is not all yours to keep.

Perhaps the biggest consequence of this process is the lasting impact that it has on your credit report. Debt settlement can seriously lower your credit score and make it difficult to open future credit accounts.

Therefore, you need to weigh these consequences against the benefit of the cancelled debt before making a decision to go forward with a settlement. 

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