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Credit card debt forgiveness pros and cons to know for February

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Pursuing debt forgiveness could offer you significant relief — but there are downsides to consider beforehand. Getty Images

Many Americans have seen higher credit card balances in recent months due to the current elevated-rate environment, an uptick in spending and the increased costs of living. But if your credit card bills are piling up, it's important to start looking for solutions now. After all, if your credit card rates are anywhere near today's average — which is closing in on 23% — the interest charges are compounding quickly and that can make it increasingly difficult to dig your way out of debt. So, the sooner you tackle the issue, the easier and more affordable it may be.

But what if you're facing other hardships and can't afford to keep up with even the minimum payments right now? In this case, credit card debt forgiveness may be worth considering to regain financial stability. This type of debt relief allows you to try and settle your debt for less than what's currently owed, alleviating some of the financial pressure you're facing. It can also be an appealing alternative to bankruptcy, which can have a temporary but detrimental impact on your finances.

Before pursuing debt forgiveness, though, it's helpful to consider both the advantages and disadvantages of this type of debt relief right now.

Compare your debt relief options online now.

Pros of pursuing credit card debt forgiveness this February

The benefits of pursuing credit card debt forgiveness right now include:

Potential for lower settlements

Delinquent credit card payments are on the rise right now, and that could work to your advantage if you're pursuing debt forgiveness. With default rates rising, creditors may be more willing to negotiate settlements to try and recoup at least some of what's owed. After all, lenders typically prefer to accept partial payments over a total loss, so in many cases, debt forgiveness could lead to paying 30% to 50% less than what you currently owe. Plus, with so many people at risk of defaulting currently, pursuing debt forgiveness this February could result in even better settlement terms.

Start the credit card debt forgiveness process today.

Simpler repayment terms

Rather than juggling multiple credit card payments with varying due dates and interest rates, debt forgiveness programs typically consolidate everything into one monthly payment based on what you can afford. The money from these monthly payments is then held in an account until enough has accrued to start offering settlements, making the repayment process more manageable.

Protection from creditor harassment

Once you're enrolled in a debt relief program, most debt relief companies will handle all future communication with your creditors on your behalf. This can provide you with much-needed relief from collection calls and letters as you work through the debt forgiveness process, though it's important to note that this protection isn't absolute.

A shorter repayment timeline

If you're stuck making only minimum payments on high-rate credit card debt, you could be in debt for years or decades, especially if your debt is accruing interest charges at today's high rates. Credit card debt forgiveness programs, on the other hand, will typically aim to resolve your debts within two to four years — so if you start the process this February, you could be debt-free in just a few years. 

Cons of pursuing credit card debt forgiveness this February

The potential downsides of pursuing credit card debt forgiveness right now include:

A negative credit score impact

One of the biggest downsides of debt forgiveness is the impact it can have on your credit. You typically stop making payments to creditors so that you can save up for lump-sum settlements and that can seriously damage your credit. Settled accounts are also reported as "settled for less than the full balance," which can lower your credit score significantly. With lending standards getting increasingly tighter, this credit damage could be particularly problematic for future financial needs.

No guarantee of success

Your creditors are under no obligation to accept settlement offers. While many creditors will try to find a compromise, some may refuse to negotiate and others may have strict policies that make the process more challenging. If your creditors don't accept your settlement offers, you could be left with mounting late fees and interest charges, which could worsen your financial situation.

Potential tax consequences

The IRS considers forgiven debt as taxable income, meaning you could owe taxes on the amount that was settled. For example, if you settle a $10,000 debt for $4,000, you may need to report the $6,000 difference as taxable income on your return. That, in turn, could put you in a tough financial position when filing your taxes.

The bottom line

Debt settlement can be a viable option for those struggling with overwhelming credit card debt, but it's not the best solution in every case. It could make sense to pursue this type of debt relief this February, but it's crucial to carefully weigh the pros and cons before committing. While it can offer a path to debt relief, the potential risks — such as credit score damage, tax liabilities, and creditor lawsuits — should not be overlooked.

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