Should I Take a Settlement Offer on My Credit Card Debt?

I had chose to put the majority of my credit cards on a debt reduction plan or otherwise known as a balance liquidation program (BLP). Because of this, all of my personal credit card debt is currently on schedule to be paid off within the next four and a half years. If not sooner if I can help it. I have had difficulties paying our business credit cards as well, and I have been offered by my creditor to put this card on a balance liquidation program or to settle with them on the card. Should I do this? I don't think so.

Here's why:

First off, if you want to make a settlement offer on your credit card, you have to be seriously behind on your payments and have more than a few bucks set aside to take the settlement offer. In my case I am 7 months behind on this particular card.

The credit card company will forgive a portion of your unpaid debt if you can make a lump sum payment that covers some of the money you owe them. In my case I owe a little bit over $11,000 on my business credit card  and the credit card company is willing to settle for $2,300. In this case I need to be able to pay over $600 a month for the next four months in order to take this offer.  So I need to have the ability to pay  the $600 + immediately. There is no getting my balance lowered to $2,350 and then making payments on it for several years. It's four month's or nothing. If you don't have the money available you can't take the settlement offer. My thought however is, if you have the money to make the settlement payments, why don't you have the money to make the lesser regular payments?

Next, if I take a settlement offer my already reduced FICO score will take an even bigger hit. A settlement basically means you didn't live up to your obligation to pay your debt in full. This will definitely impact your credit score. There is a chance however if you had a previously great credit score and have suffered a job loss or a medical emergency, not to mention if the debt isn't huge, you may be able to talk the creditor into not reporting the settlement.

Thirdly, the biggest reason I don't want to take a settlement is the tax ramifications. You have to pay income tax on the amount credit card debt forgiven.

It is law that the credit card company must provide you with a IRS 1099-C cancellation of debt form that includes the amount of debt forgiven, which in turn is money that you will owe income tax on. There is no tax break for credit card settlements. There is one exception to this rule, which is, you must be insolvent. This means the amount of your liabilities is more than the value of all your assets. If the forgiven debt is reported to the IRS on 1099-C form, you will need to attach a letter to your tax return explaining the insolvency. If not, the IRS will likely perform an automatic audit, since the 1099 doesn't match your reported income on your return.  If you are going to try this, you need to be able to document that at the time your debt was forgiven, your liabilities outweighed the fair market value of your assets. I definitely would meet with my tax advisor on this one.

Needless to say, I will be taking the balance liquidation program offer. Although, it will run me about $200 a month. It's better than dealing with the IRS next year.  Beside that, I caused the debt and I have a responsibility to pay it back.

(Photo via eHow)

[This post is written and copyrighted by Financial Elite (http://financialelite.blogspot.com/ ).] Did you enjoy reading this article? You can receive free full-text articles from Financial Elite by RSS in your email inbox daily by entering your email HERE. Your  email will only be used for this daily subscription, and each email will include a link you may use to unsubscribe at any time. Also follow us on Twitter.