Credit Card Debt Forgiveness Comes at a Cost

Credit card debt forgiveness is one way that you can eliminate your credit card debt. Even though it is possible to get rid of a large amount of debt quickly, it is going to come with a steep price. Here are a few things to consider about credit card debt forgiveness and why you might want to avoid it.

Credit Card Debt Forgiveness

With this process, the company is going to agree to take less money than what is owed on your credit card. In order to arrange this, you are going to have to pay them a lump sum of money. You are going to give them the lump sum, and they will cancel the rest of the debt that you owe. 

High Cost

Even though you are getting rid of a certain amount of debt, you still had to pay for the amount that you borrowed. Most of the time, when a company agrees to do this it is after several months of collections and late fees. You have also paid credit card interest on the balance, which is traditionally very high. Therefore, you still paid the credit card company quite a bit of money regardless of whether you settled with them.

Credit Score Damage

Perhaps the worst part of this process is that your credit score is going to be badly damaged. According to the credit bureaus, you are not living up to your end of the deal that you entered into with your credit card companies. When you opened your credit card, you signed something that said you would repay any debts that you accumulated. Since you are not doing this, they are going to knock your score down. Besides bankruptcy or foreclosure, nothing is going to hurt your credit score worse than this. When your credit score is damaged, it can be very hard to fix it. Because of this damage, you are going to have to pay more money in interest on any loans that you get in the future. It may also be very difficult to get approved for any type of credit. Therefore, although you are potentially getting rid of a few thousand dollars, you are costing yourself many more thousands of dollars in the future. Consider how much interest you will have to pay on a 30-year mortgage if your interest rate is one or two points higher because of this. 

Tax Implications

You should also be aware of the tax implications of this move. Even though it seems as if you are getting a break, the IRS does not look at it this way. According to the IRS, this is money that you earned for the year. This means that you will have to count it as regular income for yourself and pay taxes on it. If you are close to another tax bracket, this could potentially put you over the bracket limit and end up costing you quite a bit of money in taxes.

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