What if you can’t pay your credit card bills?
There are perhaps more answers to that question today than a few years ago, back when credit was easy to get and no one’s credit limit was getting cut.
The nation’s tough economic times have given credit issuers plenty of trouble. And that has made them more willing to cut deals with troubled debtors.
Credit card delinquencies have been running at all-time highs, tracking pretty close to the nation’s unemployment rate, at around 10 percent. Credit card companies are eager to cut some sort of deal, says Gail Cunningham of the National Foundation for Credit Counseling. “They want to get any money they can.”
If you can’t afford to make your credit card payments, and you don’t want to consider filing for federal bankruptcy protection, here’s an overview of some steps you can take:
• Know what will happen if you stop making credit card payments: Your credit score will drop. It will happen within a month. A lower score has broad impacts, from what you pay for insurance to rates on other loans being raised.
• Start by talking to a credit counselor. You can find one through the National Foundation for Credit Counseling (www.nfcc.org) or one of the many Consumer Credit Counseling agencies in your neighborhood.
These not-for-profit agencies have trained counselors. They work with the credit card companies to cut your interest rate, eliminate late fees and work out a monthly payment that you can afford. The counseling is funded by creditors, grants and sometimes fees or contributions from the clients.
• You may enter a debt management program. This can last up to five years. All your credit cards will be closed. You will begin making payments to the counseling agency, which then pays the individual creditors. The payments could be much lower, as much as 40 percent lower, than what you paid on your cards before the plan.
The debt management plan will be reported to the credit bureaus, but it will not affect your credit score, so long as you and the counseling agency pay your debts on time.
• If that won’t work for you — and you may not be able to afford even those payments — consider a debt settlement company. But be careful. This is a difficult path and should be seen as a last alternative to bankruptcy.
Debt settlement companies are for-profit businesses that charge a fee based on the amount of your debt.
You’ll close your accounts. You begin making payments to the debt settlement company to build a fund to be used later to pay off your settled debts.
You’ll hear from collectors. You may get sued. A judgment could be filed against you.
The settlement company will try to reach an agreement to cut down what you owe.
But, when the debts are paid, your credit report will show that as a partial payment or a settled debt.
This is a serious negative mark on your report. Your credit score will drop, anywhere from about 45 points to as much as 125 points.
And to top it off: Forgiven debt is taxable. Your creditor will issue you a 1099-C at the end of the year. You’ll owe federal income tax unless you can convince the IRS that you are insolvent.
Or try this third path: Do it yourself.
A credit counselor cannot, at the moment, reduce your debt. That’s a tool they don’t have, but Cunningham says discussions between the counseling industry and banks are trying to work something out.
But you can ask for a debt reduction yourself. Stories are beginning to make the rounds about banks slashing customers’ credit card balances, if the card is already delinquent.
“Some people are settling directly with the credit card companies,” said Geri Detweiler, credit advisor for Credit.com. “And once you stop paying, you may find some of your creditors coming to you with offers.”
If your account has not been charged off, Cunningham says you can negotiate a debt reduction, but you will have to pay that sum off quickly — maximum is three payments.
If your account has been charged off, then you may be able to reach a settlement with different terms. “Anything goes,” at this point, Cunningham said.