Has a little piece of plastic landed you in a big struggle?
If you’re one of the roughly 67 million Americans who can’t pay their credit card bills this year, the answer is likely affirmative.
Thankfully, there are debt resolution programs that can help. Yet, you need to know what you’re getting into, first.
Before you contact a third-party company to help you overcome your credit card debt, there are certain steps you should take. Read on to learn how to prepare for debt resolution the smart way.
Find the Right Company
There are myriad companies that market themselves as debt resolution providers. While most of them are legit, there are scammers out there who are ready to prey on an already-vulnerable population.
That’s why your first step in this process should be to do your research. The Federal Trade Commission (FTC) recommends that you put each prospective debt resolution company through a series of tests to ensure they’re legitimate.
Let’s take a look at each one.
No Agreement Guarantee
A debt resolution company will contact your creditors on your behalf. Once they connect, they will seek to make your financial obligations more favorable. In some cases, they can even eradicate them altogether.
Yet, they cannot control whether or not the creditor will agree to the terms of their proposal. Remember: Creditors are not under any obligation to settle your debt at all.
Thus, if any debt resolution company promises you that the agreement will go through, it’s likely a scam. An estimated percentage of your response rate is appropriate, but hard numbers are impossible to provide at this juncture.
Transparent Pricing Structure
Look for a company that lays all of its pricing obligations out at the very beginning. You shouldn’t get halfway through the program only to discover hidden fees and surprise add-on charges.
You should not have to sign up to participate in the program until you have a full understanding of your financial obligation. In fact, all of the fine-print details
The company you choose will need to work with you directly for a while before creditor offers begin. This is to help you save up some money so you’re financially stable enough to start. In some cases, this initial planning period can take months or even years.
Your debt resolution company should be able to clearly articulate how much time they’ll need before they can enter the negotiation stage. You should also know exactly how much money you’ll need to save before you can get started.
You’re hiring a debt resolution company to work with your creditors. Still, that doesn’t mean that you’re completely removed from the situation altogether.
A reputable team will send all offers to you prior to accepting them to ensure you agree to all of the proposed terms.
Prepare for Debt Resolution Financially
You’ve taken care of the first step and you’ve found a company that meets all of the above requirements. Now, it’s time to get your financial affairs in order.
Successful negotiations hinge on how much money you have saved. For that reason, it’s time to start building up your savings account if you haven’t done so already.
The debt company you partner with should let you know in advance how much money you’ll need on hand before they can start calling your creditors.
Once you agree on those terms, you’ll start making routine deposits into a special, separate bank account for a given period of time. In turn, your debt company will use that money to pay your creditors back.
One more legitimacy check?
The account that your team opens should be in your name. It should also be insured by the Federal Deposit Insurance Corporation. If neither of these factors is true, inquire about those details to your point of contact.
Get Everything in Writing
Once you’ve saved enough money, your debt resolution company will begin contacting your creditors. If they’re able to reach an agreement, it’s important to make it official.
A verbal promise doesn’t hold much weight, so be sure to ask for every decision in writing. This way, you have solid documentation for your records and can show evidence if there are any disputes down the road.
Both you and the credit card company should sign the agreement.
Understand Tax and Credit Score Implications
If the amount of debt absolved by any negotiation is more than $600, let your tax advisor know.
Forgiven debt that exceeds that threshold can be considered income by the IRS. You’ll need to know your exact calculations come tax time, so it’s better to start keeping track of it now.
Another issue you might not have considered? Your credit score.
If you’ve reached the point in your debt that you’re considering resolution, then it’s safe to say that your credit score isn’t too high.
Before agreeing to resolving your debts, confirm they’ll report the tradeline to the credit bureaus as “paid in full” so that you get that positive benefit to increasing your credit score.
Getting Debt Resolution Right
If you’re feeling crushed by your debt burden, there are ways out. One of those is debt resolution.
While the process can take time and isn’t always successful, it’s worth trying if you’ve exhausted all of your other options. To increase your odds of reaching the agreements you need, you can’t rush into the process.
Rather, take the time required to prepare for debt resolution, one step at a time. Do your research, compare your options, and find the team that’s right for you.
Considering debt consolidation instead? Click here to tell us about your situation and see a list of personalized offers!