Credit card debt settlement: 7 Legal questions to cure your debt woes

Credit card debt settlement is basically a debt elimination program where the creditor agrees to receive a reduced amount from the debtor and takes it as full payment. You can settle credit card debts either by negotiating with the credit card company or by getting help from a debt settlement company to negotiate on your behalf.

How does a legal credit card debt settlement program work?

Credit card debt settlement program usually works in the same way as debt settlement programs do. Once you approach a trustworthy credit card settlement company, they handle the entire credit card debt elimination process on your behalf. Click here to know more.

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What are the signs that you need credit card debt help?

Below are some simple signs mentioned to let you know that you badly need credit card help to cure your debt problems.

Your savings are completely drained out.
You're unable to bear the minimum monthly payments on your credit cards.
You are badly screening repeated collection calls.
Your creditors are threatening you with lawsuit filing and wage garnishment.
You are thinking of taking out another loan to pay off your credit cards.

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What are 5 benefits of getting legal help to settle credit card debt?

Read below to know the 5 possible benefits of getting legal help to settle credit card debt:

1) Reduced debt amount: In a credit card debt settlement program, a certain percentage of the outstanding balance is reduced. This makes it far easier for the debtor to unload the debt burden.

2) Late fees are eliminated: Often all the late fees and other penalties are eliminated during the negotiation process of a credit card debt reduction program.

3) No legal hassles: Once you enroll in a legal credit card debt reduction program, chances are less that your creditors or collection agencies will file a lawsuit against you. It's because they realize that they will eventually get their money back. Even if any creditor sues you, the credit card settlement company may provide you with legal assistance.

4) Reduced collection calls: Once you get enrolled in a credit card debt settlement program, the company starts handling all your collection calls, and tackle your creditors. However, in certain occasions, your creditors can call you.

5) Avoid bankruptcy: As you can easily settle your debts through credit card settlement, you are not required to think of a heart wrenching decision like bankruptcy.

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Why credit card debt settlement is better than bankruptcy?

Credit card debt settlement or bankruptcy - which is better and convenient? Check out the comparison done below to know the answer.

1) Costs and fees associated: In a credit card debt settlement program, you have to pay the credit card debt help company a certain portion (often 20%-25%) on the amount you save through negotiation. However, if you file for bankruptcy, you need to get help from a professional bankruptcy attorney by paying $1,500 and often several times than that, and moreover have to pay the court fees (something around $300).

2) Tenure: Chapter 13 bankruptcy filing often takes around 3-5 years to complete, which includes the bankruptcy petition, mandatory credit counseling session, creditor's meeting (341 meeting), distribution of assets and bankruptcy discharge. However, the tenure of credit card debt settlement depends on the debt amount. If the debt amount is low, it can be settled within much less time than what bankruptcy procedure demands.

3) Credit report: In a credit card settlement program, your credit score drops as you don't pay off the full balance and the creditors report the accounts as "Paid as Settled" or "Paid as Agreed" to the credit bureaus. However, in a credit card settlement, you can compel the creditor to remove all the negative information from your credit report just through a “Pay for Delete” agreement. While, if you file forchapter 7, this remains in your credit report for 10 years from the date of filing. On the other hand, chapter 13 stays on your credit report for 7 years after the repayment is completed.

4) Convenience: Credit card debt settlement is much more convenient than bankruptcy. In a credit card settlement program, the settlement company handles everything on your behalf so that you can become debt free. However, bankruptcy is a hectic procedure. Apart from consulting a professional attorney, you have to remain present in the court premises on the hearings, attend a credit counseling session, attend creditor's 341 meeting and fill out a lot of forms.

5) Future employment: These days, whenever you apply for a new job, some employers enquire whether you've filed any bankruptcies in the past. Based on this information, any potential employer can reject your candidature. However, this is not a case with credit card debt settlement.

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Does credit card settlement affect your credit score?

It is likely that credit card settlement will have a negative effect on your credit score as your creditor is compromising a huge amount in the program. The creditor reports the said amount as a loss. Again, the negative marks left on your credit report often remain there for up to seven years and include any past due payments, charge offs, accounts being sent to collections and judgements. However, in comparison to your overwhelming and all-encompassing debt burden, this is a very small compromise. Moreover, in comparison to bankruptcy, the credit impact is much less in a credit card debt reduction program. If you file for bankruptcy in order to get out of debt, you'd literally ruin your credit report and the mark will stay there for 10 years.

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What are the tax consequences of credit card settlement?

Commencing from 2010, the IRS considers any forgiven debt amount that is more than $600 as taxable income. Therefore, the creditor must send you IRS Form 1099-C (Cancellation of Debt), and at the end of the financial year, you must pay income tax on the forgiven debt, just as you do on other forms of income. However, if you are technically bankrupt, then filing IRS form 982 may exempt you from paying taxes on the savings that you had from the settlement.

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How can you choose an ethical credit card debt settlement company?

First, shop around for a legitimate and ethical firm to get help with your credit card debt elimination. Simply enter the company's name with the word ‘complaints' into a search engine and go through what others are saying. Wise up and choose someone whom you can trust with your money. Below are 6 tips to find out a reliable and honest credit card debt settlement company.

1) Research: Shop around as many companies as you can. These days, there are many credit card debt reduction companies - some are trustworthy, most are bad. So you should cautiously shop around and compare the options you come across.

2) Ask questions: Ask anything and everything to the company that you want to know. Enquire about their fee structure, how they will settle your credit card debts, whether or not they will prepare the credit card settlement letter on your behalf, and if they will handle the collection calls from the creditors or collection agencies. If you are not satisfied with the answers they provide, get back to tip #1.

3) Check out with the BBB: Check with the Better Business Bureau (BBB) to know how many complaints have been filed against the company and how they have responded to them.

4) Get everything in writing: Make sure you get everything in writing before getting started. If you don't, then you certainly run the risk of getting ripped off! Therefore, before signing the copy of agreement, go through it carefully.

5) Disclosure requirements: According to the Federal Trade Commission (FTC), before a consumer signs up for the services of a credit card debt settlement company, the company must give out legitimate information about the program's:

Price and terms: The company must explain its fees and must disclose any condition on their services.
Results: The company must disclose how long it will take to provide you with results.
Non-payment: If the company asks you to stop making payments to your creditors, they must tell you about the consequences of doing so.

6) Follow up: See if the company provides you with reports of progress in your case. As the credit card accounts are in your name, you hold the rights to know what's going on with your accounts.

Credit card debt has become an indispensable part of everyone's life. If you can't thing of living without this plastic money, you have to bear credit card debt burden. Though credit card debt settlement is not the only way out of this crisis, it's undoubtedly the best to help you with your crushing credit card debt.