After being overwhelmed by the burden of credit card debt, it can be tempting to resort to negotiations for a convenient way out. However, the process of credit card debt negotiation is not always as easy as one might assume, especially when it’s conducted by an inexperienced cardholder on their own behalf. Negotiating with credit card companies and account managers can be an exhausting experience that is not for the faint of heart. In fact, many people eventually agree to terms that are less than ideal after basically giving up on dissolving the debt via negotiations. Anyone trying to negotiate their way out of credit card debt by themselves should consider the following information.
Negotiations Could Worsen Credit
It’s possible for credit card negotiations to worsen the credit score, depending on how the card company reacts to the cardholder’s propositions. This is because most people who attempt to negotiate their credit card debt by themselves have their credit frozen immediately. If the credit card is already maxed out then the effects have likely already taken their toll on the credit score; however, if the cardholder still has credit available and the credit is frozen, the credit score could be negatively impacted as a result of the lowered credit line.
Taxes May Need to be Paid
Even when the negotiation is somewhat successful, many people end up owing taxes on the debt forgiven by the credit card company. For example, if a lender forgives more than $600 of debt, they are required to file a 1099-C form with the IRS. Thus, even if a large lump sum is paid to the credit card company in order to dissolve the debt at a discount, the cardholder still must pay taxes on the difference between the total amount and $600. It’s important to note that these taxes only apply to the card’s principal, not to interest charges or fees.
The Credit Report May Be Affected
Some credit card negotiations can result in a negative item impact on the credit report, even if the debt is dissolved. In fact, in some cases a partial debt settlement can be just as bad for the credit report as a complete default. Thus, it’s important to find out how the repayment efforts will be reported on the credit report before agreeing to any negotiations. If the card company only reports a partial payment then the credit score will usually be affected. Unfortunately, regardless of what is said during the negotiation, the card company is not obligated to adhere to the reporting requests of the cardholder, so there is always a possibility that the credit score could be impacted. Even so, it’s extremely important to obtain a written copy of the negotiated agreement before agreeing to any repayments.
Similar Posts:
- Why it is a Bad Idea to Close Your Credit Card Accounts
- Ask Creditnet: Is My Credit Card Reporting Correctly?
- Bankruptcy and real estate taxes: Counties are desperate
- Confusion About New Credit Score Disclosures
- Debt relief – Know about the 4 different forms available
