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When you are drowning in debt it often seems like there is no solution to your problems. Don’t despair. You may find that your creditors have a policy of credit card forgiveness.
What does this mean? When you have a credit facility in place, you will owe a certain amount of money made up of what you originally borrowed or spent, interest and other charges. If you fall behind in your contractual payments, the company will normally charge you a late payment fee. They may even increase the rate of interest you are paying. The result is that you can find your debts increasing at a very fast rate.
Some companies will accept a lower amount than you owe in settlement of the account. So if your statement shows an outstanding balance of $6,000, they may let you pay $4,500 and close the account without taking any further action to recover the balance. If you do negotiate a settlement like this, you need to ask the company to confirm in writing that they are accepting it on a “full and final” basis and that they will not seek to recover any more money in relation to this debt in the future.
You do need to be aware that if they accept a lower amount and the difference between what you owed and what you paid was $600 or more, you need to declare the figure on your tax return. You may be liable to tax on this figure as the IRS may treat it as additional income. Whether they do or not will depend on your personal circumstances, your income, deductions and overall financial situation.
You also should know that if your creditors accept reduced amounts, your credit record may be adversely affected. This can make it very difficult for you to obtain new borrowing facilities in the future.
So before you take any action you should make sure that credit card forgiveness is the right route for you. It may at first seem like the easy way out but things are not always as they first appear. It seems obvious but the best way to get out of debt is to try to raise the cash to repay your debts in full either by selling assets or working additional hours. This is not always possible.
It is imperative that you compile a financial budget which proves that you can afford to pay any settlement figures offered while at the same time ensuring that you are not swopping a debt for a tax bill and a damaged credit rating!
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