Credit Card Debt Forgiveness
Debt forgiveness is when a credit card company cancels a portion of your debt and you no longer owe that debt amount. It may sound appealing but like a rose, there are several thorns in the process.
First, in order for a creditor to consider offering credit card debt forgiveness, you need to be severely delinquent. Typically, creditors offer a settlement to customers that haven’t made a payment in 6 months or more. Once the creditor feels like you are never going to pay this back or file bankruptcy, that’s when they will consider forgiveness.
Second, there will be tax implications with debt forgiveness. Let’s say you owe $10,000 in credit card debt. And your creditor is willing to forgive $6,000. You now owe taxes as if you earned $6,000. According to the IRS, you must report the canceled debt on your tax return for the year in which the forgiveness occurred.
Third, you need to have the money saved up to pay the settlement in full. Using the same example above, you would need to pay the entire $4,000 in one payment for the forgiveness to get approved. Most people struggling with credit card debt typically don’t have that much cash available.
And finally, falling far behind on your accounts can lead to creditors suing you and possibly garnishing your wages. Not to mention the damage done to your credit score.
If you are current with your accounts, avoid debt settlement if you want to remain current and keep your credit score intact. Credit Counseling or a Debt Management Program (DMP) might be a better option for you. You will pay back 100% of what you owe with a DMP. The main benefits of a DMP are lower month payments and lower interest rates. Get started online.