A credit card debt settlement can help you avoid bankruptcy. But how do most people find themselves with too much debt?
Because they used their credit cards a little too much, and then can’t make progress reducing their outstanding credit card balances.
And we all know this: Debt Hurts.
Most people would like to pay off their credit card debt each month. Then something comes up, and it seems convenient to just make the minimum payment.
But credit card debt accumulates quickly if balances are not paid in full each month. And making the minimum payments on a credit card is a waste of money.
A $2,000 credit balance with an 18% annual rate, with a minimum payment of 2% of the balance, takes just over 30 years to pay off.
Making minimum payments on your credit card is a treadmill to nowhere,” says Greg McBride, chief financial analyst at the personal finance website Bankrate.com. During that time, you would end up paying more $4,931 in interest and charges, 146% more than the original balance on the card, according to an online calculator on CreditCards.com.
Why? Because the credit card company decreases the amount of the minimum payment as the outstanding balance decreases.
If you pay only the minimums, your balance will decline over time, but so will your payment and as a result the amount of principal that you pay off each month will decline as well. Let’s compare this scenario to one in which you start at your current monthly minimum payment of $400 and hold it constant over time. The following graph shows these payments over time:
Unless resolved, unpaid credit card debt will take a toll on your happiness, your family and your mental health. Eventually, it will overwhelm you, and make you tired and sick.
Those who report high levels of debt stress suffer from a range of stress-related illnesses including ulcers, migraines, back pain, anxiety, depression, and heart attacks.
See The Debt Stress Connection (webmd.com) and Debt Impact on Mental Health: How to Rebuild Your Finances (creditcards.com)
Soon enough, there comes a day of reckoning. Maybe you have one too many fights over money. Maybe you need to choose between the utility bill and the credit card bill.
Or maybe you’re faced with a lawsuit or garnishment.
But you face the fact that something needs to be done to get rid of the credit card debt, and the stress caused. When that day comes most people assume that they need to file bankruptcy.
But there is often a better option. A credit card debt settlement that we negotiate on your behalf, as your personal attorney.
What is a credit card debt settlement?
A credit card debt settlement is not a contract to get you out of debt for a low monthly fee. And it is not a debt consolidation loan that would put you further in debt.
A credit card debt settlement is a compromise of your credit card debt that we negotiate as experienced bankruptcy attorneys. It is intended to keep you out of bankruptcy by resolving your debt for pennies on the dollar.
What are the advantages to negotiating a credit card debt settlement through your attorney?
- We can defend you against lawsuits where a creditor doesn’t have a right to collect.
- We can stop a creditor from obtaining a default judgment, and garnishing your bank account or your wages.
- We can enforce the Fair Debt Collection Practices Act and Washington Consumer Protection laws.
- We understand how a bankruptcy filing can be used to relieve debt if a creditor is unwilling to settle.
- We are dedicated advocates for debt relief, with long years of experience helping individuals work through their financial issues.
- And we bring a certain amount of authority to the bargaining table.
Creditors can easily verify our experience, and understand that a settlement may be their best alternative as well.
That makes a difference.
In short, as bankruptcy attorneys, we can effectively negotiate with your credit card company. And we are accountable to clear ethical rules of conduct that govern our professional conduct, and provide transparency and certainty.
Debt settlement companies have no such standards.
Debt relief service scams target consumers with significant credit card debt by falsely promising to negotiate with their creditors to settle or otherwise reduce consumers’ repayment obligations. These operations often charge cash-strapped consumers a large up-front fee, but then fail to help them settle or lower their debts – if they provide any service at all.
See Federal Trade Commission – Debt Relief Repair Scams
We don’t work that way. We don’t get paid unless we finalize a debt settlement if it is acceptable to you.
Then we’ll oversee the documentation, coordinate payment, and confirm the elimination of the credit card debt.
What are the fees for a successful credit card debt settlement?
If we’re successful, our fee is 20% of whatever you save.
So if you have a credit card balance of $5,000, and we settle it for $1,500, our fee is 20% of $3,500, or $700.
Because we earn more with better settlements, we have a stake in getting you the best-possible outcome.
If we’re not successful, there’s no charge.
How are credit card debt settlements funded?
We obtain best results when we are able to fund a credit card debt settlement immediately. This requires our clients to have quick access to the settlement funds.
This often requires assistance from a friend or family member. Or, clients are sometimes able to borrow against their homes to fund settlements, or borrow from their retirement fund – although that can trigger tax penalties.
Other clients, over time, have been able to accumulate a “war chest” to fund settlements as they are negotiated. And a few can just negotiate lower payments without funding a lump sum.
All of these strategies can be effective under different circumstances.
What’s the impact of a credit card debt settlement on your credit score?
A negotiated credit card debt settlement will be reported as “debt settled for less than the full amount due.” Other phrasings may include key words such as “partial payment accepted,” “settled” or “settlement.”
Credit bureaus differ in how they format credit reports, but the description for settled accounts will appear in the same section where comments such as “this account is in dispute” or “closed by credit grantor” appear.
Any negative payment history associated with the account will remain on the credit report. The account should show an updated balance of zero, and the date the settlement status should be added to the report.
See bankrate.com – How is a debt settlement reported?
Are there any other considerations?
A compromise of credit card debt will give rise to income from the cancellation of indebtedness, which may be taxable as ordinary income.
A creditor that accepts a compromise over $600.00 must issue a Form 1099-C, which reports to the IRS how much was owed, and how much was paid to settle the debt.
The savings can be considered taxable income, depending on whether the taxpayer is solvent before and after the compromise, and depending on other factors that may exclude the debt forgiveness from taxation.
The tax impact of cancellation of debt income should be discussed with your tax advisor.
We represent parties to credit card debt settlements in Spokane, Seattle, and throughout Washington and Idaho. Just email us, or give us a call at (509) 624-4600 if you’d like to discuss a credit card debt settlement, and learn more about resolving your outstanding debt on terms that you can afford. Or schedule a free phone consultation.