The Truth About Credit Card Debt Settlement (Part 3)

Posted On: April 21, 2009

By Curtis Arnold, CardRatings.com Reporter

Editor’s Note: This article is the third of a three-part series about debt settlement.

Taxes and Settlement

The IRS classifies forgiven debt as income. (That’s true even if the settled amount included interest or penalty fees.) If you owe $10,000 and settle for $6,000, the difference is considered to be taxable income. This tax will, however, often be waived if you can prove insolvency at the time of making this settlement. An accountant can tell you more about the conditions which must be met to settle.

How Can I Find A Reputable Debt Settlement Company?

Be cautious. There are a lot of companies which offer these kinds of services. Some are unscrupulous, while others simply have not been in business long enough to establish a track record. There are several things you should avoid when considering one of these firms:

1. A company with high upfront fees. Some of the best settlement offers come in the first few months after you stop paying. But if you’ve spent all your money on fees to the settlement company, you won’t have any money left to settle! All companies charge something up front, but it’s best to work with a company that uses the “performance based” fee model, where they get paid based on their success negotiating settlements.

2. Heavy sales pressure. Some debt negotiators are paid very high commissions (from those high upfront fees!), and don’t care whether the debtor will be successful in the long run.

3. Misrepresentation. Avoid companies that make it sound like you are in a “payment plan” with your creditors, or that propose a “four-year plan” to settle your debts. If you cannot settle your debt within 24-36 months using settlement, you run the risk of being sued.

Tip: Better Business Bureau ratings are often not helpful in evaluating settlement firms. The BBB’s current rating system prevents any settlement company from earning more than a “C” rating, and some are given “D” ratings, even if they have no unresolved complaints.

For more help deciding if debt settlement is the best option for you, check out the Consumer Recovery Network. You may also want to review Stop Debt Collectors: How to Protect Your Rights and Resolve Your Debts, by Gerri Detweiler and Mary Reed, for advice on how to deal with unfair collection tactics.

If you are interested in the self-help approach, you can find tips at ZipDebt.com. On a related note, if you have been unsuccessful at negotiating a lower rate on your existing credit cards, you might want to consider shopping for a new low rate credit card. As a reminder, you can compare low credit cards on CardRatings.com!

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This article was written by Curtis Arnold, a nationally recognized consumer educator and advocate. Curtis has been educating consumers about credit cards since 1998. He is regularly interviewed and quoted by respected members of the national press regarding consumer credit issues. His new book, How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line is available now! Order online and receive up to a 32% discount.

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CardRatings.com is the most comprehensive source for comparing credit card offers. CardRatings.com is pleased to offer consumers free credit card ratings.

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