Credit Card Debt Settlement Suits Both Creditors And Borrowers

Credit card debt settlement is a double-edged tool that is designed to benefit both the creditor and the borrower. Whereas the creditor is able to recover at least a part of his investment, the borrower is able to eliminate his debt by paying only a fraction of the original loan amount. This tool is most effective when the borrower's credit card account has been delinquent for some time or if it is nearly written off. This is the stage when the lender will gladly accept whatever amount is settled with the borrower but it has to be paid in a short time and in one payment.

Why Would A Creditor Accept Lesser Amount?

When the creditor starts feeling that he might not get anything and that he stands to lose the entire amount of money that he had lent to the borrower, he will welcome the idea of a credit card debt settlement as he will recover at least part of his money. By doing so, he can reduce his losses. The borrower will also jump at the prospect of being able to get rid of his debt by paying a very small amount. The fear of bankruptcy being declared by the borrower will spur both the creditor and the borrower into going in for a quick online debt settlement.

Many credit card debt consolidation counselors include credit card debt settlement as part of their credit card debt settlement advice. However, the creditor will only accept credit card debt settlement if the account is delinquent for at least 90 days.

What Are The Precautions That A Borrower Should Take?

The borrower should be aware of the possibility that the creditor might turn over the unrealized amount of debt to a second collection agency. However, this is not done normally. Moreover, as a borrower you are liable to pay tax on the portion of the debt that has not been paid as per the debt settlement as the IRS considers it to be your income, especially if the amount is more than $600.

You should go through your credit report to see if the debt has been mentioned on it. You should only take action if it is there in the report. When a debt settlement is done, your report will carry a comment that the debt has been settled for a lesser amount. This would be construed as a negative remark and if you want to avoid it you should try to negotiate with the original creditor or the collection agency and work out a repayment plan for clearing the balance amount of the debt. You should make sure that everything is in writing and that you get a "release of debt" from the creditor as proof that the debt has been liquidated.