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In today’s economy, many people find themselves in trouble Credit card debt is expensive. With credit card interest rates average 23% now, any credit card balance you carry can quickly balloon out of control, leaving you looking for a solution to alleviate the burden that explains the rapid compounding of credit card debt. While there are many solutions to consider, forgiving credit card debtalso known as loan debt, it is one of the options that can seem particularly attractive.
When you are trying to pay off debt, the goal is to reduce the total amount owed on a credit card by negotiating with the creditor, allowing you to pay off the balance less than the original amount. In some cases, this type of debt relief may even lower your balance by 30% to 50% or moreproviding major relief from high levels of credit card debt.
The promise of settling a large debt for pennies on the dollar can seem like the perfect solution, and it certainly can be, especially if you’re active. brink of bankruptcy. However, the program is not always as simple as it seems, and the process of negotiating debt forgiveness can be complicated. So before pursuing this option, it is important to understand what the potential risks are.
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6 risks of getting credit card debt forgiveness
Possible risks with debt forgiveness include the following:
It may not result in less debt
One of the biggest risks of pursue credit card debt forgiveness i.e. there is no guarantee that the creditor will agree to pay less than the full amount owed. Creditors are under no obligation to negotiate or forgive any part of your debt. If they reject the settlement offer, you still owe the full balance, plus any late fees and interest that have accrued during the negotiation process.
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It can cause long-term damage to your credit
Loan forgiveness programs almost always come with significant benefits impact on your credit score. If you stop making payments to your creditor while the settlement process is ongoing, your account will become delinquent, which will be reported to the credit bureaus. Accounts in arrears and settled accounts (where the creditor agrees to accept less than the full amount) can remain on your credit report for up to seven years. This will lower your credit score significantly, making it difficult to get a loan, credit card or home, until your score improves.
Interest and fees can accumulate
During the debt settlement process, you are usually advised stop making payments to your creditors, which may result in the accumulation of fees, penalties and interest. That means unpaid balances can grow significantly due to late fees and high interest rates before settlement negotiations begin. If a settlement isn’t reached, you may end up owing more than you originally did because of these charges, which could leave you in a bigger financial situation than you started with.
May result in legal action
Another risk in pursuing credit card debt forgiveness is potential for legal action. If the creditor cannot forgive part of the debt or refuses to negotiate, they may decide to sue you for the unpaid balance. Court judgments in favor of creditors can result in wage garnishment, bank account levies or liens on your property. Legal proceedings can also increase the overall cost of debt and further damage your financial standing.
There may be tax consequences
Many people don’t realize that debt is forgiven often considered taxable income by the IRS. If a creditor forgives $600 or more of your debt, they must report that amount to the IRS and you will receive a 1099-C tax form. This means you have to pay taxes on the forgiven amount, which can create an unwanted financial burden. While some may qualify for insolvency exemptions, this is not always the case.
There may be other charges
A company that pays off debt charge fees for their services, which may vary, but usually will be several between 15% to 25% of the total loan received. These fees may be worth it depending on the outcome of the negotiations, but they can still eat into any savings you can get through the forgiveness process.
Bottom line
While credit card debt forgiveness may be an attractive option for people overwhelmed by debt, it’s important to weigh the risks carefully. There’s no guarantee of success, and the long-term consequences — from damage to your credit score to potential legal action — can be severe. So, while you may find that debt forgiveness makes the best sense for your situation, you should still consider it all your debt relief options before making a decision. Being informed and careful can help you avoid unintended financial problems.
