What is debt forgiveness?
The average American owes about $40,000 in personal debt, which is a staggering. debt figure considering it does not include mortgages and other larger loan products. It can be difficult to pay off this debt, due to the high cost of living expenses. Debt consistently grows if left unaddressed, which makes it difficult to manage. For instance, people who can only afford minimum monthly payments on their debt will keep getting new debt added onto their balance. Debt forgiveness offers a way to alleviate the effects of debt.
Debt forgiveness is literal, and involves cancellation of some or all of your debt. However, true debt cancellation is really difficult to find. In many cases, debt forgiveness will involve a heavy personal cost such as bad credit, additional taxes and lost security.
How does debt forgiveness work?
Debt forgiveness is tailored differently for a variety of loans. For credit card debt, you may only qualify for some debt forgiveness after being unable to make payments for an extended amount of time. Even then, lenders will only agree to forgive debt if the borrower makes a lump sum or arranged series of payments on a part of their debt. Mortgage debt forgiveness involves loss of equity. You will be forced to give up your home under mortgage debt forgiveness, but will still be faced with taxes as forgiven mortgage debt is considered by the IRS as a taxable income. Some loans will not be eligible for debt refinancing. Your student loan, for instance, will not be forgiven even when you file for bankruptcy.
Is debt forgiveness the best option?
Debt forgiveness attracts some cost, which could make it a bad idea for you. In order to qualify for debt forgiveness, you will have to be consistently unable to make repayments. This will affect your credit rating, and could make it harder to access any financial services and products after your debt is cleared.
Forgiven debt is also considered by the IRS as income, which attracts some tax. If your debt is high, it will attract heavy taxes and may set your finances back. The unexpected and unaffordable surprise may attract penalties, which could include jail time. You will need to talk to an expert when applying for debt forgiveness to find out whether you may be eligible for an insolvency exception. However, this will also cost you money.
There is a high risk with debt forgiveness because there are too many shady agencies available. Aside from the large number of scammers in the field, some legitimate debt settlement agencies will affix fees onto your proceedings that will make it a costly option.
What are viable alternatives to debt forgiveness?
You should consider alternative ways to settle your debt that may not attract ramifications. Credit counseling offers viable financial advice for debt management. Using zero balance transfer credit cards could help you reduce interest on debt, which will increase your disposable income levels and allow you to clear off debt faster. You may also consider online budgeting tools for free financial help.