What Does the Process of Settling Credit Card Debt Look Like?

person holding out a credit card

Credit cards can be a great help when you need some extra spending power. However, the buy now, pay later proposition of credit cards gets many people into a financial jam when it comes time to repay their creditors. Consequently, many people carry a balance on their card that grows ever larger, until credit card debt settlement may be the best solution. In fact, settling credit card debt is one of the most common financial processes in the U.S.

Because most credit cards carry a high interest rate, repaying thousands of dollars in a timely manner often requires debt negotiations. If you are in a position where you need to pursue credit card settlement with the assistance of a credit consultant, below is a step-by-step process of what settling credit card debt is likely to entail.

1. You Provide Proof of a Serious Financial Hardship & Other Necessary Documents

A financial hardship is likely what is keeping you from being able to make large debt payments on time and constantly. That’s why, before receiving debt relief assistance, you may be required to provide evidence of a financial hardship. This may include proof of income via pay stubs or W2s and proof of outgoing bills, including a mortgage, car loan, hospital bill, utilities, and even debt repayments.

When seeking debt settlement services, you may want to also bring your credit report with you or have your consultant get ahold of it for you. This is a great tool for you and your debt consultant to use to build your case for why you need to negotiate your debt. In addition to showing the details regarding all your different debts, our report could include evidence of credit delinquency, such as unpaid debts or consistently late payments, that lenders will take notice of and may want to resolve through a settlement.

2. Your Debt Consultant Proposes a Settlement Amount

Based on the amount of debt you carry, as well as how much money you will be able to put towards your credit card debt settlement repayment, your credit consultant will approach your creditor to propose a settlement amount. This could be up to half of what you originally owed, but it’s important to have a range of what you can reasonably afford to pay, complete with a high and a low end.

Because of your financial hardship, many lenders are willing to accept a portion of what you owe. It allows them to collect some of the debt, rather than none at all. Moreover, when choosing a debt consultant, find one who has a great working relationship with various creditors. Their experience may help your lenders trust the outcome of the negotiations and make them more willing to agree to a new debt amount.

3. The Money You Owe Creditors is Put into an Account

The money that is needed for your settlement may be collected from you gradually and put in a secure account. It could be your normal savings account, or it may be a new one that is proposed and set up by you and your debt consultant. Remember, you should always have access to that money, no matter where it’s kept safe.

After that, you and your debt consultant may set up a payment plan with your lenders that will automatically occur either monthly or all at once, depending on the agreed-to terms. This distribution process means you don’t have to worry about remembering to make regular payments or about being late.

4. You May Need to Pay Taxes on the Money Saved

Depending on how much you originally owed and how much you end up settling your credit card debt for, the IRS may recognize the amount of money you saved via negotiations as taxable income. It also depends on how much you funneled into your special debt account and how long it sits in the account. In most cases, the taxes are minimal. However, if the money sits in the account for a year or longer, paying taxes is a likely reality. With that said, the amount you are likely to pay in taxes is probably worth settling a debt that would cost you far more in the long run.

5. Pay the Required Debt Consultant Fees

Debt specialists typically don’t work for free. However, the fees that they charge are sensitive to the fact that those whom they help are in a difficult financial position. It is likely the amount they charge will be based on a percentage of the settlement amount. The good news is that a debt consultant should let you know upfront exactly how much they will charge, so there is no guesswork involved. More importantly, it is against the law for any debt relief company to charge for their services before they actually provide you with help.

6. Start Paying Back the New Amount Owed

Now that you and your consultant have proven why you need assistance, determined how much you can reasonably pay back on the amount you owe, and gotten your lenders to agree to the new amount, you can start the repayment process. After debt settlement negotiations, creditors will expect your payments on time.

If you didn’t set up a separate account with automatic disbursals, as discussed above, you’ll have to remember to budget carefully and have the amount due each month by the specified date. Late payments on a negotiated amount will incur serious late fees and could cause your lender to distrust you and pull back on the agreement.

Conclusion

Settling a credit card debt often involves several unique steps like these, which a credit consultant can apprise you of. Your settlement process may happen precisely according to this list, or it may involve fewer steps of a different nature. To get started on credit card debt settlement, please contact Liberty Debt Relief today to schedule a free consultation.

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