If you are having trouble paying your bills, the worst thing you can do is just give up and stop making your credit card payments. Some people are tempted to do this because credit card debt is unsecured -- there is nothing for the creditor to take away, as happens with a car loan or a mortgage. But if you have a charge-off on your credit report, you will have difficulty getting a future loan, a job or an apartment, and your wages could be garnished. A better option is to try to negotiate a partial payment.
About Debt Settlement
Negotiating a partial payment is called debt settlement. Call your credit card company and explain your hardship situation. You probably need to have missed two or three payments to have any leverage. Don’t wait longer than that, because once six months has passed with no payments from you, the credit card company charges off the account, and then it goes to a collection agency. If you have been making your payments on time, the credit card company would prefer you to keep doing so and won’t be as receptive to negotiation. Offer to pay 50 percent of what you owe. It’s better if you have a lump sum in cash. If not, you would probably be expected to pay off the settlement within six months. The credit card company does not have to settle with you, but if it does, get the deal in writing, and request that the credit card company report to the credit bureaus that your debt was settled.
Debt settlement is better than walking away from your credit card debt, but if you are successful in paying less than what you owe, your account will be closed and your credit score will suffer. Having a debt settlement notation on your credit report is not as bad as having a charge-off, but you still might have difficulty getting future loans, or if you do get them, your interest rate will probably be higher. You also might need to pay taxes on the amount you didn’t have to pay. The Internal Revenue Service views this as “phantom income,” and requires that you report it.
Debt Settlement Companies
Debt settlement companies claim they can negotiate with your credit card company for you and get you a deal anywhere from 30 percent to 70 percent of what you owe. They charge a fee to do this, and there is no guarantee your creditors will negotiate with them, either. Whatever you do, do not give any money up front to these companies, but it is OK to deposit money in a dedicated account that an account administrator oversees to pay the debt settlement company fees.
Consider contacting a credit counselor to teach you how to handle money, debt, and bills, and how to develop a budget. Find a reputable credit counselor through the National Foundation for Credit Counseling. Other avenues for finding a counselor would be through your credit union, military base, or a local college or university. A credit counselor can also offer suggested solutions for your current problems.
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