Credit Card Debt Forgiveness, Friend Or Foe?

When persons have large amount of unsecured debt, one option to get out from under the debt is credit card debt forgiveness. While forgiveness of a debt means that you no longer owe the money, there are some other effects that should be taken into consideration before you sign on the line for credit card debt forgiveness.

If credit card companies sense that a debtor is about to default on their card debt, they are more likely to consider forgiveness that they will if the client is faithfully trying to eliminate debt by making payments every month. While this may seem unfair, consumers should think like credit companies. If someone is going to default on a debt, the creditor often feels that any payment, even a partial one is better than no payment at all. Many companies may even send an offer in the mail to settle a debt for less than is owed once the client has missed a few payments.

If persons are having difficulty in meeting their credit obligations, they may want to call the creditor to see about negotiating the debt. Some of the experts claim that debtors should not use the phone, but any offers should be sent in the mail and copies kept. Some go as far as to recommend all offers be sent certified mail with a request for a return receipt. If at a later date, the debtor defaults on the debt, he will have proof of attempts to rectify the situation.

If your creditors refuse to accept your offer at debt negotiation, you could be forced into bankruptcy. Bankruptcy is a legal way to force creditors to accept less than the amount owed. The court will determine the exact amount of money each debtor will be able to collect on the debt.

In cases other than bankruptcy, when a debt is forgiven, the amount of forgiven debt is reported to the IRS as income on a form 1099C. The debtor must claim the difference in the amount paid and the amount owed in the negotiation process. This can increase your tax burden for the next year.

Under a credit card debt forgiveness plan, whether through bankruptcy or negotiation with the company you owe money can have serious consequences on your credit report and credit score. Debts are often reported “paid” or “paid as agreed” instead of “paid in full.” Future creditors will understand the difference in terminology and your credit score will drop. The impact may affect your ability to secure credit in the future. You may find that you pay more for car payments and insurance because you have entered into an agreement to pay less than the full amount due on the bill.