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Getting into debt is easy. A bad month leads to a balance on the credit cardAnd with compound interest working against you, it may not be long before you’ve racked up a large credit card balance that you can’t pay off.
If this sounds like a problem you’re facing, you’re definitely not alone. According to the Federal Reserve Bank of New York, average credit balances increased nearly 6% from a year ago. American consumers now have more than $1.17 trillion in total credit card debt.
Fortunately, there are solutions to this problem.
One is credit card debt forgiveness (also called debt settlement) – an option that could even help you settle those debts for less than you owe. But this type of debt relief This may not be the right decision for everyone, nor will it be suitable for every situation.
Learn more about your debt relief options today.
Is debt forgiveness a good option right now? Here’s what the experts say
Here’s what experts have to say about this strategy and when it might work for you.
When debt cancellation can benefit you
Debt cancellation is when a creditor — a lender, credit card issuer, etc. — pays off debt. — agree to cancel part (or with some types of debt, all) of an outstanding debt you owe to them. This is more common with certain types of debt, like federal student loans, for example.
“These amounts are often forgiven through government programs or for people working in public service,” says Nate Towers, principal at Five Pathways Financial. “You can forgive a large portion of your student loans if you qualify.”
You may also be able to get a discount or reduction in your medical costs, especially if you are facing financial hardship, and there are tax debt forgivenessalso (although it’s technically called an “offer in compromise,” Towers says.)
Finally, credit card issuers forgive part of your balancebut generally only in certain circumstances.
“Creditors are generally reluctant to cancel their debts because it results in financial losses for them,” says Howard Dvorkin, president of Debt.com. “However, in situations where the debtor demonstrates significant financial hardship and the likelihood of full repayment is low, creditors may consider forgiveness as a viable option.”
Take steps now to resolve your costly debt.
The Disadvantages of Debt Cancellation
Debt cancellation may seem ideal, but as Dvorkin says: “There is no such thing as a free lunch. Ultimately, you pay the price. »
The main prize? This comes in the form of additional taxes.
“When a company decides to forgive its debt, it considers it a loss and receives a tax deduction,” explains Eric Elkins, CEO of Double E Financial. “Well, the IRS lost tax revenue, so they try to make up for that loss by taking the debt forgiveness amount and adding it to your taxable income.”
Bottom line: That means a higher tax bill next April.
To this additional tax burden is added Debt Cancellation Can Also Hurt Your Creditwhich can make it more difficult to get a loan or apply for credit in the future. It’s also a “long and difficult process,” Elkins says.
“If an entity is potentially willing to forgive your debt, they will make you work for them,” Elkins says. “Prepare to meet high eligibility requirements. Be prepared to demonstrate financial hardship. Prepare to fill out lots of forms and applications.”
The essentials
If you are in heavy debt, debt cancellation is not your only solution. debt relief option. You can also explore debt consolidationi.e. when you use a single loan or card for pay off all your debtsbasically by grouping them into one lower rate balance.
Balance transfer cards with promotional 0% rates can be a good tool for this, but “just be careful not to fall into the trap of using that new credit to spend more after consolidation,” Towers says.
You can also work with a financial advisor or debt relief company has help you get out of debt or, in many cases, settle directly with your creditors.
“Contact your creditors and try to negotiate a better deal for yourself,” says Elkins. “The worst thing they can say is no.”
