If you're considering credit card debt settlement due to the fact that you're no longer able to meet your monthly financial obligations, you may be wondering what the pitfalls may be for this type of debt relief. Or perhaps you've heard some debt settlement horror stories, and you'd like to do your best to avoid these pitfalls so that you don't become a debt settlement horror story yourself. Below are some of the most common pitfalls of debt settlement that you'll want to know about prior to entering a debt settlement program:
* Debt settlement can potentially have a negative impact on your credit score. If you've been making your credit card payments by their respective due dates each month there's a good chance that your credit score is hovering at or above 700. In order to negotiate settlements with your creditors, unfortunately, your accounts must be delinquent, thus resulting in a negative entry on your credit report. These negative entries will result in a reduced credit score until your accounts are settled and reflecting zero balances, at which time your credit score will begin to increase. Many people considering debt settlement, however, have been unable to continuously make their monthly credit card payments, and have found that their credit score has already been affected. If this is the case for you, obviously your credit score has nowhere to go but up, and negotiated settlements will result in an increase in your credit score.
* Debt settlement may result in a tax liability. I'm sure you've heard about the potential for a tax liability as a result of debt settlement. You see, creditors are required by the IRS to report forgiven debts greater than $600.00 on IRS Form 1099. This notifies the IRS that you have settled one or more of your accounts for less than the full balance, because the IRS views your canceled debt as taxable income and wants you to pay taxes on it. Fortunately, most individuals and families find that they aren't actually liable for taxes on their forgiven debt. Fortunately, the IRS has an "insolvency" rule, whereby if you're considered insolvent during the tax year that your debt was canceled (i.e. your liabilities exceed your assets), you will not face a tax liability as a result of debt settlement.
* Collection calls from your creditors may be received. If your credit card accounts are not delinquent you're not receiving calls from your creditors. If they are delinquent, however, you know what I'm talking about. Creditors reserve the right to take whatever actions are necessary to collect them money owed them, and contacting you via telephone calls is perfectly permissable and lawful. You do have certain rights, under the Fair Debt Collection Practices Act, to protect yourself against ruthless bill collectors. It's not uncommon to hear phrases such as "if you don't work with us now your account will go to the next level of collection," "I'm calling about a legal matter" and "your account is scheduled to be turned over to our legal department." Most often, these are no more than threats. While some accounts do obviously end up with an attorney, most do not.
In summary, are there pitfalls to debt settlement? Some - but the end result is a tremendous feeling of relief after your accounts have been paid off and you're living a debt-free lifestyle. You'll no longer experience sleepless nights or the necessity to juggle money around in an effort to pay your bills; you can start to enjoy life again after your accounts have been settled and you no longer have monthly bills which are beyond your ability to pay. If you're planning on hiring a debt settlement company to assist with your debt, I urge you to research your options very carefully so that you hire a company that is ethical, honest and has only your best interest in mind.
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