Settling Credit Card Debt

Settling credit card debt yourself is possible but should be done the right way or not at all.  Forget about those stories that tell you you can cut your debt in half using this tactic. It isn’t that simple.  You can settle debts with credit card companies and other financial institutions but it may not be the escape you are looking for.  While you are weighing up your options do not stop paying your accounts.  Some people will advise you to stop paying any of your creditors for six months.  Their logic is that you should save the money and then in 6 months time offer the companies you owe money to a settlement figure i.e. less than what you owe them. They advise your creditors are likely to be grateful for anything you offer them after this period of no payments but this is completely untrue.  What is more likely is that your creditors will lose all patience and either start legal proceedings or pass your debt over to collection agents.  Settling credit card debt can ruin your credit rating so it should be done as a last resort.

It doesn’t matter if you are settling credit card debt with Chase or any other financial house.

The worst thing you can do when you are struggling with debt is to put your head in the sand and ignore it. You need to keep your creditors advised of your situation if you want them to treat you professionally.   Follow these tips to debt settlement and you should be much better off:

1) Write to all of your creditors to advise them that you are struggling financially.  If you can afford to pay the minimum monthly payment then do so.  Alternatively offer to pay them $1 in the short term until you have worked out your budget.

2) You need to work out a financial budget.  It isn’t the most exciting thing you will ever do but you will never know how to manage your money until you do this.  The best thing to do is keep a spending diary for a month and record everything you spend money.   Also try to work in cash as that will help you avoid those impulse purchases.  Once you know exactly where your money is going you will be able to find areas where you can cut back. A budget is simply a list of your outgoings (essential and non essential) and your incomings. Hopefully when you write everything down you will find you have more money coming in than going out.

3) As part of your budget you need to list out all of your creditors.  Try to list them in order of importance and this doesnt mean by who shouts the loudest. You will usually find that the credit card companies are the ones that will make the most noise i.e. ring you or write to you all the time.  But your unsecured creditors i.e. credit cards and personal loans need to be at the bottom of your list.  You must pay your mortgage, secured loans (those attached to your home), taxes and other preferential debts before you pay any other creditors.  If you only have credit card debt then you simply list them in order of how much you owe making note of the minimum payment and the interest rate.

4) If you have a lump sum available or have think you can accumulate one, you can think about settling credit card debt.   Be careful that you do not cause yourself a tax problem.  You are probably thinking why would the tax man be interested in me paying off my debts early?  Well he isnt usually but if you make a settlement offer and it is accepted, the credit card companies are obliged to file a 1099-C.  This is a cancellation of debt notice and one is filed every time a reduced settlement is accepted on a financial debt.   For example if you owe $20,000 and the credit card company accepts $10,000, they will file this 1099-C with the Revenue. In turn the Revenue may decide to add the $10,000 that was written off to your income for the year and claim tax accordingly.  This is obviously a situation you want to avoid.  Not everyone would have to pay tax but there is a risk that you might.

Dont think that this only happens in cases involving a lot of money. The forms are filed if the difference between what you owe and the agreed settlement figure is more than $600. And this is not the worst of the news.  If you proceed with settling credit card debt, you must put details of every transaction that was settled on your 1040 tax return and file a copy of the 1099C with your federal return.  So if you are sure you want to settle your debts, you need to seek advice from a personal tax adviser who is experienced in this area.  Dont look to the finance houses for help as they are not that willing to help those customers who pay back less than what they owe.

5)If you can maintain minimum payments on all credit cards and your credit is good you may want to try credit card consolidation to see if that gives you an easier way to pay off your debts.  Settling credit card debt may seem like a great idea but when you see it can ruin your credit rating as well as land you in trouble with the tax man you may not want to proceed with this way of getting out of debt.

If you want additional help managing your money ask to see an expert from a local non profit credit card consolidation company.