When you’re in debt, you might be ready to seize any option that promises to get you out of a bad situation. That’s human nature, but it can also be dangerous.
The truth is that many consumers don’t understand how credit card debt works and what their options are when they feel stuck. That’s why myths about credit card debt forgiveness are common.
Debt forgiveness is when a creditor cancels some or all of your outstanding debt. Unfortunately the saying, "Too good to be true," applies here. Most legitimate creditors won't erase your debt just because you ask. In fact, there are many scam artists waiting to take advantage of people who think otherwise.
At Addition Financial we work with our members to give them a loan to consolidate their debt, or put them on a payment schedule that works with their financial situation. In most cases "debt forgiveness" doesn't mean your debt is removed all together.
Before you make any decision regarding your debt, you should know what the myths are – and what the truth is. With that in mind, here are six myths about credit card debt forgiveness you should know.
One of the most common myths is that when you settle a debt, it won’t have an impact on your credit score. In fact, the opposite is true. Even if you’re granted debt forgiveness due to a hardship such as unemployment, it will still affect your score.
In fact, negotiating a debt settlement may have as big an impact on your FICO score as bankruptcy. It may still be the best option for you, but it’s important to know that it’s not a free ride, either.
Sometimes, people operate under the misconception that if they call a debt consolidator or their credit card company, they can qualify for forgiveness under any circumstances. Debt consolidation companies advertise as if this were true, but it’s not.
The truth is that if you’re employed and capable of making regular payments, it’s unlikely your debt will be forgiven. Most companies will consider forgiveness or settlement only if the debtor is experiencing real financial hardship. Some examples include unemployment, pay cuts, divorce and outstanding medical bills.
It might be frustrating, but these guidelines are there for a reason. They protect lenders from being taken advantage of by people who simply don’t want to pay their bills.
Our third myth has to do with what it costs to negotiate credit card debt forgiveness. It’s true that there are debt consolidators who will negotiate for you – for a price. But, you don’t have to rely on them if you don’t want to.
If your financial distress is clear, you can call your debtors, explain the situation and work with them to negotiate payments accordingly. Of course, there are risks associated with doing it yourself. An experienced negotiator is likely to have a better idea of what credit card companies will accept than you do.
That said, if you want to save some money and feel confident in your ability to negotiate, you might want to try handling the settlements yourself.
On a related note, it’s a common misconception that consolidating your debts won’t be expensive. Fees from one company to another may vary, but the most common fee structure requires debtors to pay a percentage of their balance as a fee.
The biggest variable here is which balance the fee is based on. Some consolidators base it on your original balance, while others charge only on the balance to be forgiven. It’s your job to make sure you understand what you’ll have to pay before you sign on the dotted line.
One mistake some debtors make is thinking that they’ll be required to pay a fee upfront, before a settlement is reached. That’s not the way it works. In fact, it’s against the law ever since the enactment of a Federal Trade Commission rule prohibiting such charges.
When you contact a debt consolidation company, their first order of business is to get information from you about what you owe, and to whom you owe it. Then, they’ll negotiate a settlement and let you know what you’ll have to pay.
Once your debt has been forgiven, you don’t have to worry about it – right? When it comes to the IRS, the answer is not as simple as you might think.
When credit card debt is forgiven, the IRS sometimes sees it as a form of income. If they do, it means you’ll have to report the forgiven debt on your tax return and pay taxes on it. Make sure you understand how consolidation will impact your taxes before you move forward.
If your credit card debt is out of control and you have financial hardships that make it impossible for you to pay, then applying for credit card debt forgiveness may be the best option. However, before you commit, make sure you understand your options. In some cases, bankruptcy may be a better choice.
If you have any questions feel free to contact your local branch to speak with an experienced member of our team.