The unfortunate truth is that it just doesn’t work that way. While you can absolutely get your debt forgiven, and you can pay off your debts with less money than you would traditionally, the process is a little different than what you might think.
That’s because there can be a whole lot of rules, regulations, bills and damage that comes along with debt forgiveness. Plus, you could end up with trouble finding the right debt company, because the wrong one is going to make it really hard for you to get things done.
What is Debt Forgiveness?
Well, in short, debt forgiveness is just getting some portion of your debt entirely forgiven. But that’s quite a difficult thing to come by. After all, you’re going to have things like a lowered credit score, increased taxes and possibly even foreclosure on your house to contend with.
When you do attempt debt forgiveness, it’s also not going to happen immediately. It’s going to take a really long time and your creditor and you are going to have to negotiate it together. On top of that, it’s going to be quite difficult to get it done entirely on your own. You’re likely going to want to work with a company. And you’re going to have to provide that you are never going to have enough money to pay off everything you owe. That’s when the lender will agree to accept less money than the full payment. What Can You Use Debt Forgiveness For?
Student Loan Debts
When it comes to student loan debt forgiveness you’re going to have some limitations. It’s going to depend on things like your income and what you’re currently doing as a job, as well as how much money you actually owe. Plus, if you have private loans they can’t be forgiven. You have to have federal loans for that and they need to be forgiven through public service.
When we look at the public service loan forgiveness option it’s about what you’ve accomplished and done for the government. It was put into place by George W. Bush back in 2007 and it gives you loan forgiveness if you make payments for ten years and work for a not-for-profit or government entity (along with other qualifications).
- The loan must be a federal direct loan
- You must work for a 501©(3) non-profit, a government organization or some type of public service non-profit.
- You must have made 120 payments that were on-time and either part of the standard or income-driven repayment plan
Later, during President Obama’s time in office, the student loan forgiveness was extended to cover a wider array of student loan holders. Instead of only following these specific professions, the new student loan relief program offered forgiveness to any student with a loan who was struggling. The student was given lowered payments based on their income and after 20-25 years the rest of the loan would be forgiven. It provided an easier path to debt repayment for most students.
When it comes to private loans you’re not going to have quite as many options, but you’re definitely going to have some. The best thing you can do is talk to the current lender that you have and see if you can reduce your payments to something that you can actually afford.
Credit Card Debt
The best thing you can do about credit card debt is to make sure that you take action before they sell the debt to a collections company. If you’re dealing with the credit card company directly you’re going to be better off.
Your credit card company has what’s called a ‘hardship department’ and those are the people you want to talk to when you first start having problems. They want to get their money, so they’re willing to work with you on things like a longer due date, getting rid of added fees or lowering the amount of interest you’re paying. It’s even possible that you can decrease your payment amount, though you’re going to end up paying more, in the long run, that way. The best thing you can do for your credit score is keep your account there, rather than getting it sent to a collection agency.
Now, if you’re not able to fix things entirely on your own you could talk with a credit counseling agency. You want to work with one that’s accredited by the National Foundation for Credit Counseling and take advantage of their free phone consultations. From there, you can find out about the different options and learn how to prevent as much damage as possible to your credit report. That’s going to mean creating a plan to keep your debt current and to establish a budget.
Negotiate Directly With Collection Agency
It’s also possible to negotiate directly with the collection agency if your debt has already been sent there. The key is to make sure you know what you’re saying. You need to protect yourself and you don’t want to say anything that can be used against you. If you’re able to negotiate a single payment to eliminate the debt or installment payments you may be able to get through it more quickly.
What you should know is that if your creditors forgive more than $600 of debt you will have to count that as taxable income. If you owe $7,000 and they forgive $900 you’re going to have to pay taxes on the $900 they forgave. The government treats it like you had that money given to you. Just make sure that you know the rules and that you know how you could get yourself out of paying that tax also, such as if you’re insolvent. That would mean you have more liabilities than you do assets at the time of your settlement.
When it comes to your mortgage it’s quite difficult to actually get your debt forgiven. Your mortgage company expects that you’re going to pay back the money that you owe.
In general, to get this type of forgiveness you’re going to have to be willing to walk away from your house. A short sale or foreclosure could give you debt forgiveness, but you might have to pay taxes. That’s because, according to the IRS, debt forgiveness is taxable. If you sell your house for less than it’s worth and the mortgage holder agrees to accept that amount as payment in full, that’s a short sale. You get to put the house up for sale and you get to take offers, but your mortgage lender is the one who decides what they’re going to take. At that point, you move out and the house is sold to the buyer that the mortgage lender accepted.
When it comes to what’s called a nonjudicial foreclosure there are certain rules that must be followed by the lender. The state actually sets these and if the lender is following them you don’t need to worry about going to court. What happens with this one is that your house goes to an auction and whatever it sells for is the amount that pays off the loan. You’re completely off the hook.
The Department of Housing and Urban Development does have options for you, if you qualify, which will help you to reduce your debt or reduce your payments. The Hardest Hit Fund is one of these options. But there is also the option for forbearance (giving you a break on your mortgage payments) and even mortgage modification or repayment plans.
Some states aren’t going to allow this past 2020, and some aren’t even accepting applications anymore, so make sure you note which states those are.
Debt Forgiveness – Things To Consider
Here are the main things you should consider regarding debt forgiveness:
1. Your Credit Score
When it comes to debt forgiveness your credit report is going to be affected. The lender that forgives your debt will report it and that means it’s going to be showing up for a total of 7 years.
Unfortunately, it’s going to be a very negative influence on your report and it’s going to lose you (likely) upwards of 100 points. The amount that it impacts slowly goes down throughout that 7 years.
The IRS looks at debt that’s forgiveness as income and that means you’re going to want to be careful about how much you forgive and whether a different option might be better. You’ll need to pay income tax on the money or you’ll end up in debt with the IRS instead.
That’s definitely not what you want, especially since the government is definitely going to go after their money. Make sure you consider how much you’ll owe in taxes when you are calculating the amount of money you can pay to a collector.
Another option when it comes to debts is bankruptcy, but it should only be considered if you’ve looked at every other option. It’s going to serious impact your credit score and a whole lot more, so it should always be a last resort.
For those who really don’t want to go through individual negotiations with different collectors and debts this could be a way to take care of it for you. The court actually looks at all of your debts and decides how much you will pay and to whom. That means you could end up with a good thing (all things considered) or a bad one.
When you do file for bankruptcy you’re going to have some different options. One of those is for you to liquidate some of the assets, selling items you own that are worth a lot of money. This happens with a Chapter 7 Bankruptcy.
With a Chapter 13 Bankruptcy, you’re going to get to keep your physical possessions. You’re not going to get over it as quickly however, because you’ll be paying on your debt for a set period of time (generally 3-5 years). Only after you’ve made those set payments for the time period will your debt be discharged. You’ll also have additional costs with this type of bankruptcy and you’ll have things like credit counseling that you have to go through.
When you do go through bankruptcy it’s going to help your debt, but it’s going to dramatically affect your credit. That’s why you should always do your homework first.
Debt Settlement Companies
These companies may not always tell you the right thing, and they may even tell you to stop making payments entirely. When you do that, they start negotiating for you, but you end up with all the problems.
In many instances, these companies will engage in entirely unfair practices or may tell you that there are practices that will wipe out your debt or they may guarantee you certain results. They may even charge you a whole lot of fees.
With some you have to deposit set amounts of money for a period of time. For many, it’s extremely difficult to get through the program. Make sure you don’t sign anything without at least checking their Better Business Bureau rating.