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What You Need to Know When Settling Debt

By Talha Alvie on Jan. 5, 2011

hiding-behind-c-note-(1).jpgIf you’re drowning in debt, you may have considered settling with your credit card company. Before you do so, there are a few things you need to know.

The best solution to debt problems is obviously paying off all of your debt. As this may not always be feasible, settling your debt with the credit card company is probably your second best option. Keep in mind that, once you settle an account with a credit card company, a “settled as agreed” comment will appear on your credit report. This will most likely have a negative impact on your credit report, but it is significantly better than having unpaid accounts.

Given this, you should weigh the impact of having a “settled as agreed” comment on your credit report against the cost of paying off your debts in full. In most cases, it is more cost effective to choose the former.

Another option you may be considering is turning to a debt settlement company. This may seem very attractive, but in the end may be a very costly solution. One of the biggest problems is that settlement companies often don’t tell you how much they’re going to charge. Some charge a percentage of total debt or debt savings, while others charge a flat fee. In addition to all of this, their services are not inexpensive.

Finally, you should note that debt settlement is taxable. Any debt forgiveness exceeding $600 is considered taxable income. You should also weigh any changes in your taxes when deciding whether or not to settle your debt.

The major lesson to take away is that you should carefully note the pitfalls of debt settlement before you consider it. It is not a solution for everyone, but if done right it can help make life a little easier.
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