Debt forgiveness is not a clean slate, and it is harder to make work than many people realize. In fact, debt forgiveness is an industry, which means your best interests may not always be prioritized. You need to understand this industry in order to see if debt forgiveness is really the right choice for you.
While many student loan forgiveness programs have been around for some time, the government recently loosened the regulations. Now, it is possible to apply for student debt forgiveness no matter what career path you pursue. In the past, you usually had to work in a public service industry to be considered.
Even with this, you still have to fulfill strict requirements. You must be able to prove that you have a low income relative to your debt payments, and in many cases, you need to have paid down the loan over a period of 20 or 25 years. This excludes many young people, and it does not alleviate the burden altogether.
The biggest catch is on your taxes. If your debt is forgiven, it is usually marked as income. This may not apply to all people, but you need to check the rules carefully to make sure your tax burden is dealt with properly.
Credit card companies understand that if you declare bankruptcy, they probably will not get anything. This is why they may settle. However, just like with student loan forgiveness, your settlement comes with tax implications.
Moreover, any settlement is likely to harm your credit score. Usually, your payments have to be overdue before the credit company will consider settling. By the time you reach this point, your credit score will be in shambles.
Even if a debt forgiveness company works on your behalf, there is no guarantee that your creditors will cooperate. Instead, your settlement drags on for weeks, months or years. Bankruptcy resolves the matter quickly and efficiently, giving you a better opportunity to start over.
Traditionally, lenders would only charge off your debt. This simply means the lender, after taking your home through short sale or foreclosure, accepts you will not repay the rest of your loan. Your burden is then transferred to your taxes.
Fortunately, after the housing crisis, laws were put in place to change that. Current legislation was slated to last through 2016, allowing mortgage forgiveness without the accompanying tax burden. Even so, to get mortgage forgiveness, you probably still have to lose your home and ruin your credit.
There are two alternatives that may provide hope. Two government programs are designed to help homeowners with mortgage rates that are untenable. However, restrictions abound, and some programs are expected to end in 2017.
The IRS is not overly sympathetic when it comes to debt. Dealing with tax debt can be especially stressful since the IRS can get your money in many ways. It may take your refund, garnish your wages, seize your property or use a lien on your bank account. The IRS can even hold your passport or take your Social Security.
The only relief from tax debt is if the IRS believes you are unable to repay the money. This is not just about your income or savings. This is about all your assets. To get forgiveness for tax debt, you have to have nothing left.
Instead of asking for debt forgiveness, you are best served with a payment plan. However, if you do get debt relief from the IRS, you can at least take comfort in knowing there will be no further tax bills related to the debt.