Best Way To Settle Credit Card Debt – If you’re in debt and can’t pay your bills, is a debt settlement plan the cheapest way to get out of debt? You can draw that conclusion from a recent report from the American Fair Credit Council (AFCC), a trade association of companies involved in the credit settlement industry.

Debt settlement, also known as debt relief or debt adjustment, is the payment of a larger amount to the lender by settling the debt for a lower price than the debt. Depending on the situation, loan settlement offers can be as low as 10%. Up to 50% of your total debt. It is up to the lender to decide whether to accept it or not.

Best Way To Settle Credit Card Debt

Best Way To Settle Credit Card Debt

“Debt settlement can save consumers money by allowing them to pay off their debt for less than the full balance,” said Jerry Detweiler, author of the e-book.

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“This is a way to get out of debt for some people who can’t pay back the full amount they owe,” he added.

Consumers can try to settle their debts or hire a debt settlement company for them. In the second case, you will pay the company a fee calculated as a percentage of the registered loan. Registered credits are the total credits you have when you join the program. By law, the company cannot collect this fee until your debt is settled. Fees average 20% to 25%.

Debt settlement may also incur tax costs. The Internal Revenue Service (IRS) generally considers forgiven debt to be taxable income. However, if you can prove to the IRS that you are bankrupt, you will not have to pay taxes on the bad debt. If your total liabilities exceed your total assets, the IRS will consider you bankrupt.

According to AFCC data compiled by Freedom Debt Relief, one of the nation’s largest debt counselors, debt settlement is the cheapest option compared to debt counseling or minimum monthly payments, as the chart below shows.

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However, whether or not debt settlement is the most expensive option depends on your specific circumstances.

Ironically, consumers enrolled in debt settlement programs who are unable to manage their debt burden — but still make payments, albeit infrequently — have less bargaining power than non-payers. So the first step is to stop making payments altogether.

“Credit scores can be affected during debt settlement, especially in the early stages,” says Sean Fox, co-president of Freedom Debt Relief. “Once consumers start making payments on settled debt, their credit scores usually recover over time.”

Best Way To Settle Credit Card Debt

Paying less than you owe can have a big impact on your credit score, sending it into the mid-500s, which is considered bad. The higher your score before you fall behind, the bigger the drop. Late payments can stay on your credit report for up to seven years.

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Not making payments means incurring late fees and interest, which add to your balance and make it harder if you can’t pay off your loan. Consumers can expect to be harassed by debt collection phone calls. Lenders may decide to sue consumers for debts over $5,000—debts that are worth their trouble—which can lead to wage garnishment.

“The more money you have to pay, the faster you can pay off the debt. “The longer you go without paying your debt, the more likely you are to be prosecuted,” Detweiler said.

After this damage, there is no guarantee that the lender will accept a settlement or settle the debt for less than you expected. For example, Chase does not work with debt settlement companies. It only works directly. A consumer or nonprofit credit counseling agency that helps consumers. The Consumer Financial Protection Bureau (CFPB) warns that fines and fees for unpaid debts can wipe out any savings a debt settlement company makes, especially if it doesn’t have one. Pay off all or most of your debt.

When the process works as planned, debt settlement benefits everyone involved. Consumers save money by getting out of debt, debt settlement companies make money for providing valuable services, and creditors receive more than they would have if the consumer defaulted or filed for Chapter 7 bankruptcy. Chapter 7 bankruptcy involves liquidating the debtor’s nonexempt assets and using the proceeds to repay creditors. Excluded assets vary by state, but often include household and personal property, certain amounts of home equity, retirement accounts and cars.

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Comparing debt settlement, Detweiler said, “If a consumer qualifies for Chapter 7 bankruptcy, it’s a quick option. It’s a legal process that can stop collection calls and lawsuits. Debt settlement doesn’t offer those guarantees.”

However, he added, “There are various reasons why Chapter 7 may not be a good option. Consumers may be giving up assets they may have. Or they may not want their financial problems to be a public record.”

Because some employers will check an applicant’s credit history as part of the hiring process, individuals may find their job prospects limited if they declare bankruptcy.

Best Way To Settle Credit Card Debt

Another problem faced by many consumers in debt is not being able to afford a bankruptcy attorney. In some cases, the court may reject their presentation.

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“Many consumers don’t qualify for bankruptcy protection,” Fox said. “Work loans, reduced working hours, medical expenses, death in the family, divorce, etc. are available to any consumer exposed to unavoidable financial problems. Pay their debts.”

Although Chapter 7 bankruptcy can be filed within three to six months of closing, it can take years to pay off debts. It can reduce stress and you can rebuild your credit score faster

Many debt settlement programs require you to deposit a certain amount into a certain savings account each month for 36 months or more. Before signing up for a plan, make sure you can make the deposit for the duration of the debt settlement plan.

Making minimum monthly payments on high-interest loans is not a good option for consumers looking to save money. It can take years—even decades—depending on how much you owe and the interest rate. Interest on your balance is usually compounded daily, and with minimum payments, you make some progress toward paying off the balance each month.

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Consistently making minimum monthly payments and charging a lot of interest will make you very profitable to lenders. A strong payment history is good for your credit score, but spending more than you need to is a very expensive way to improve your credit score. A good credit score won’t pay for your retirement; bank money

Also, if the amount of credit you use is high compared to your credit line, this will affect your credit score and negate the impact of your timely and consistent payments.

Consumers who regularly pay the minimum monthly payment on high-interest credit card debt end up paying more in interest than the original principal.

Best Way To Settle Credit Card Debt

Credit counseling is a free or low-cost service offered by some nonprofit organizations and government agencies. Interestingly, these services are often funded by credit card companies. By signing up for a debt management plan with a credit counseling agency, you can lower the interest rate on your balance and waive penalty fees.

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This offer may be enough to pay off your loan faster and you may not be able to afford the new monthly payments required. Also, even if you are in dire financial straits, there will be no reduction in interest rates.

However, since you don’t have to repay your loan, your credit score may suffer less. Credit counseling can also provide additional financial assistance to help avoid such problems in the future, such as budgeting and financial advice and referrals to other low-cost assistance services and programs.

If you don’t want to file bankruptcy, how do you know which option to choose? It is usually best to get credit counseling before hiring a debt settlement company. A credit counselor can help you decide the best course of action. This may involve paying off debt, but in a way that benefits you. On the other hand, debt settlement companies may be more interested in your payments than your credit health.

Credit counseling and debt consolidation loans are suitable for consumers across the spectrum of financial status who are less financially stressed. At the same time, debt settlement and bankruptcy can help those who are experiencing significant financial stress. It really depends on the individual situation.

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The Federal Trade Commission website has helpful information on how to choose a credit counselor. The National Foundation for Credit Counseling is another

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John Pablo

📅 Born: May 15, 1985 📍 Location: New York City 🖋️ Writer | Financial Enthusiast Welcome to my corner of the web! I'm John Pablo—a finance enthusiast and writer passionate about making money matters simple and accessible.

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