Debt settlement
When you have trouble in paying off your credit card debt, your FICO score is going down and you don’t know what to do, you may be tempted to resume to another company to settle your debt for you. This is not recommended, because you can do something on your own and it will save you a lot of money.
A debt settlement company will make you stop paying your credit cards; instead you give them a sum of money which they save it for you. You usually have to pay an upfront fee between $700-$1000. Than they make a settlement with the credit card company for $.40-$.60 on the dollar and you have to pay them a percentage of the settlement.
The upfront fee is pretty much when you don’t have money, but more important is that the credit card companies are willing to settle with you directly. So if you are already behind with your payments, your debt has been charged off or it’s gone to a collection agency or is about to, if you have some money-for example if you owe $24000 to some credit card company and is now in collection, if you have $7000 and you call the collection agency directly- they will most likely settle with you.
It is very important to follow the next steps. Don’t pay the settlement using a personal bank account check; instead you can use a cashier’s check or a money order so that these companies won’t know your bank that you will be banking with. Than, on the check you must write "if this check is cashed, that makes this account (and write your account no.) settled in full.” Also, you should tell them that you want it to appear on your credit report as “This debt is payed in full" because if it appears as settled future creditors will consider you a high risk.
If you settle with a collection agency that purchased your debt from a creditor you have to ask to be released from the original creditor so that they won’t come back to ask for the difference of money. You need to have that in writing.
Finally it is possible that you owe income taxes on the amount of money that you settled for and the amount of money you originally owed. That means, in the example presented that you may pay taxes on those $17.000 difference. That is why you should ask the collection agency to state that you will not owe taxes on this money. Also you should know that if you are insolvent, meaning that you owe more than you have, the state won’t make you pay taxes on the settlement.
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