What You Should Know about Credit Card Debt Negotiation

Before you begin, there are some things you should know. Your credit score could plummet even more. When you first contact the credit card company to settle your debt, it’s likely that they’ll freeze your credit limit right away. If your cards are maxed out, that won’t matter so much. But if you’re well below your maximum credit limit your credit score could fall as a result of the lower limit. You might have to pay taxes. If you manage to negotiate a lower sum for your debt repayment, you might end up owing taxes on the portion of the debt that was forgiven. Whenever a lender forgives $600 or more of the principal, they file a 1099-C form with the IRS. This means that if you arrange a nice lump-sum payment at a discount, you’ll have to pay taxes on the difference. Note that this only applies to the principal, not to fees or interest rates that get waived. Bad reports mean bad credit. Do you know how your bank will report your repayment efforts to the credit bureaus? Find this out before you agree to any arrangement. A partial debt settlement can be just as bad for your credit score as a total default. Also, if the bank reports partial payments, your credit score will suffer. As part of your deal, ensure that the bank will report your payments as on-time and in full. This is the stickiest issue surrounding debt negotiation, since you have very little influence over how the lender will handle the reporting.