Finding yourself in the position of being unable to pay a credit card bill can be scary and lead to feelings of panic and despair. For some, avoidance is a standard response. This is not a good idea and can only make a bad situation worse. A better idea is to contact credit card companies yourself or through a third party and work to resolve the situation. A solution to this problem may lie in negotiating credit card debt reduction or forgiveness.
Identification
Credit card debt reduction or forgiveness happens when a credit card company or collection agency accepts a percentage of the amount you owe as payment for the entire bill. Creditors are more willing to accept this arrangement when you can prove you do not have financial resources to pay the entire bill even if you liquidate all financial assets. Reducing or forgiving credit card debt usually occurs as the result of negotiation.
Timeframe
Whether you work with the original credit card company or a collection agency depends on the status of your account at the time you first make contact. Most companies are unwilling to negotiate before the account is 60 to 90 days past due, but keep past due accounts "on the books" for approximately 150 days, according to the Credit Info Center. After this time, the account goes to a collection agency. Acting sooner rather than later can lessen the effect on your credit rating.
Process
Begin with an understanding of your financial situation. Creating a personal budget will help you determine how much you can afford, or not afford, to pay. Then, you can negotiate on your own or work with a third party. The process normally includes an initial contact by phone where you state your case. Additional phone calls and mailings follow-up the initial call and complete the process. Negotiating on your own is time-consuming but will save the expense of the fees third party companies usually charge. Keep detailed records that document dates, times, names, employee numbers and titles of people with whom you speak. Include details of the conversation and make copies of all documentation such as letters and agreements. If you choose to work with a third party, let the agency negotiate on your behalf.
Effect
Successful negotiations will still affect your credit score. Most companies report your paid credit card account as "Settled," indicating you did not pay the full amount. This rating will follow you for seven years. In addition, according to the IRS, credit card reduction or forgiveness is an "identifiable taxable event" subject to inclusion as "Other Income" on a tax return. If your credit card company forgives $5,000 of a $10,000 balance, you will receive an IRS form 1099-C and must report the $5,000 reduction.
Warning
The Federal Trade Commission recommends you thoroughly research third party credit counseling or debt management services. The FTC cautions the "non-profit" status many companies display is no indication the service is ethical or reputable. Check out any company you consider with your state Attorney General and the Better Business Bureau. Make sure you understand the fee schedule, services offered, investigate the qualifications of company representatives and find out if the company has a license to offer services in your state.
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