Option : Do A Credit Card Balance Transfer So You Can Pay Off The Debt Interest
This option only works if you have good credit excellent credit is better. Balance transfer credit cards offer 0% APR on balance transfers when you open the account. An excellent credit score means you qualify for the longest 0% APR introductory period possible. Some cards have promotions that run up to 18 or 24 months. That gives you up to two years to pay off your debt interest-free.
Be Aware of Fees: Balance transfers always involve transfer fees, even when you have 0% APR. You pay a fee for every balance you transfer anywhere from $3 to 3 percent.
How It Works:
- You open a balance transfer credit, qualifying for rates and terms based on your credit score
- Then you transfer the balances from your existing accounts to the new account with fees added.
- You have a set number of months to pay off your debt with no interest charges.
Make sure to calculate carefully to ensure you eliminate the balance before the clock runs out. If you can, this will give you the biggest cost savings, because there are no interest charges. Otherwise, the interest rate on your debt could be even higher than it was originally.
Consequences Of Credit Card Debt Forgiveness
The main consequence of debt forgiveness is the negative effect it has on your credit. There may also be tax consequences.
- If the creditor mentions uncollectible debt, the consequences include a flaw in your credit report. The creditor will sell the debt to the collector, who will pursue you for the money.
- If the creditor settled the debt with you, it will note on your credit report that the debt was settled for a lesser amount.
- The forgiven amount will be considered taxable income by the government and you must pay taxes on it.
How To Get Out Of Debt Through Bankruptcy
Bankruptcy should only be considered if you dont have any other options. Filing for bankruptcy may sound like youre starting over, but depending on the type of bankruptcy you pursue, you may still be on the hook for some of your outstanding debt:
- Chapter 7: In a Chapter 7 bankruptcy filing, some of your assets are sold to pay back debt, meaning you could lose your home and personal property. A few months after filing, your remaining debt will be discharged although Chapter 7 typically wont cover things like student loan debt or child support.
- Chapter 13: In a Chapter 13 filing, you get set up on a court-ordered repayment plan. Any remaining debt after a certain time, like five years, might be discharged. This process means youll spend even longer paying off your debt and have a bankruptcy filing on your credit report.
Depending on the type of bankruptcy you file, a bankruptcy filing could stay on your credit report for up to 10 years, which is why its important to carefully weigh your options and your outstanding debt. Debt collectors cant attempt to collect a debt discharged in bankruptcy, and they cant continue collection activity while the bankruptcy case is pending but the filing itself will have long-term effects on your financial health.
You may still owe a portion of your debt balances after filing bankruptcy. Furthermore, its negative impact on your credit health could hurt you financially for years to come.
Read Also: How Bad Is A Bankruptcy On Your Credit
Why You Can Trust Bankrate
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Public Service Loan Forgiveness
College graduates who go on to employment with nonprofit organizations or the government may be eligible for the Public Service Loan Forgiveness program . You must first make 120 on-time payments on your loans while working for a qualified employer. Those who meet those requirements will have the remainder of their federal student loan debt forgiven.
So far, eligible borrowers have had a hard time receiving forgiveness. The Department of Education is working to remedy this situation with a program overhaul. On Oct. 6, 2021, the Department of Education announced a limited waiver for those in public service.
To have the loan forgiven, you must meet the qualifying employment criteria and have made payments on Perkins Loans, Federal Family Education Loans, or non-Direct Loans, regardless of your repayment plan. The waiver also applies to anyone who consolidates their loans into a Direct Loan and submits a PSLF form by Oct. 31, 2022.
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What Should I Know Before Considering Debt Forgiveness
Again if a potential solution to solving debt problems sounds too good to be true, it probably is.
Some companies promise to help you avoid or reduce your debt payments for a fee, of course. Before signing documents from or sending money to a third party, check the companys rating with the Better Business Bureau.
Be prepared to walk away if anything smells fishy. Any organization you work with should be able to provide you with clear, time-bound outcomes, and explain how all your costs will add up over the total duration of your repayment and all in writing.
Take a little time to weigh the other pros and cons, too. Can you afford to pay taxes on any debt thats forgiven or discharged? If youre setting up a repayment plan or a settlement plan, how long will it take to reach a payoff date and will the extra costs, like additional interest, be manageable? Make sure to crunch the numbers and find the option thats most financially beneficial.
Don’t Expect A ‘huge’ Effect On Your Credit Score
Student loan forgiveness will probably have a modest impact on your credit score, said Ted Rossman, a senior industry analyst at CreditCards.com.
“I don’t think it will be huge,” Rossman said.
That’s because student loans are considered “installment loans,” meaning a loan you repay over a set period of time with regularly scheduled payments. Those aren’t weighted to heavily into your , which is how much you’re using of the credit available to you, he explained. Your utilization rate can account for up to 30% of your score.
Still, any score boost may help you get more favorable terms with other lenders.
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Credit Card Debt Settlement Can Feel Like A Game Of Chicken
You probably know how the game of Chicken works: Two players drive very fast cars head-on directly toward each other. The first player to swerve loses. If youre thinking that game doesnt sound like much fun, youre right. It isnt.
With credit card debt settlement, youre in one car and your card company is in the other. Your goal is to pay as little as possible. The companys goal is to collect as much as it can.
It may feel like youre playing a game of Chicken with your credit card company and subsequent debt collectors until the debt is paid.
When the flag drops, you stop making your payment. Soon, your card company will contact you and try to collect. You may both try to negotiate your way out of the situation.
To end the game, you may have to make reduced payments for a while or pay a lump sum. Your remaining debt will be forgiven. Your account will likely be closed.
Though there are some exceptions, you may owe federal income tax on your forgiven debt.
If theres no settlement, the company will eventually turn your account over to a debt collection firm. The collection firm will step into the car your card company was driving, and the game of Chicken will continue.
When Should I Apply For Credit Card Debt Forgiveness
When you begin to doubt your capability to repay your debts or if youre already behind on a month or two of payments, you might jump immediately to the idea of credit debt forgiveness. You should know that at this point, seeking a settlement may be wholly unnecessary.
Unless youre behind on your payments by more than three months, youre better off holding off on seeking a settlement. At this point, creditors know that youre still likely to be able to fully repay your debt since theyd prefer to have all of their money back, paradoxically, when your debt is not yet so large, your settlement is less likely to be approved.
Instead, to improve your chances of getting your settlement approved, wait until your creditor is deciding on charging off their accounts. When creditors charge off accounts, they are selling them to another debt collector for less than what you owe them at a loss and something creditors want to avoid. During this time, theyre more likely to settle with you.
If your account has recently been charged off to a debt collector, this is another opportunity to reach a settlement. After purchasing your debt at a discounted price, debt collectors are open to settling as theyre still turning a profit.
If youre unsure whether now is the right time to apply for credit card debt forgiveness, DebtQuest can provide the counseling you need to make your choice. Get in touch with us to learn more about how we can help you get your financial health back in check.
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What Is Credit Card Debt Forgiveness And How Does It Work
When youre sinking in a sea of credit card debt, any potential life preserver is a welcome sight. Credit card debt forgiveness offers the hope of ending your debt crisis by allowing you to settle obligations for less than you actually owe.
The borrower can settle a debt for a fraction often a small fraction of what they owe, says Anurag Gupta, a professor of banking and finance at the Weatherhead School of Management at Case Western Reserve University in Cleveland.
However, such debt forgiveness also has significant downsides that must be weighed before pursuing this route.
What Are The Consequences Of Debt Forgiveness
The consequences of entering a debt forgiveness program depend on the type of program, but typically any forgiveness program lowers your credit score until your initial debt is paid off. Debt settlements especially impact your credit score negatively since they stay on your credit report for up to seven years. In addition to paying a portion of your debt, you have to pay your debt settlement company for negotiating your settlement. Sometimes companies cant reach an agreement with your creditors, so youre stuck with the full bill and their fees.
Your forgiven debt may also be considered taxable income by the IRS. After a debt is canceled, forgiven or settled, your credit should send you a form 1099-C Cancellation of Debt document showing your total canceled debt. The IRS requires you to report this canceled debt amount on your tax return using Form 1040 and treats it as taxable income. Certain exceptions do apply, including, but not limited to, the following:
- Amounts canceled as gifts, bequests, devises or inheritances
- Student loan debt canceled due to specific loan provisions, like working in a certain profession for a certain period of time
- Student loans discharged due to death or disability
- Reduction of the principal balance of your home mortgage under the Home Affordable Modification Program
- Debt canceled in a Title 11 bankruptcy case
- Debt canceled to the extent insolvent
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What Practices Are Off Limits For Debt Collectors
A debt collector may not:
- Contact you at inconvenient times, for example, before 8 AM or after 9 PM, unless you agree to it.
- Communicate with you at work if you tell the debt collector your employer disapproves.
- Contact you after you send a letter to the collector telling them to stop, except to notify you if the creditor or collector plans to take a specific action.
- Communicate with your friends, relatives, employer, or others except to find out where you live or work.
- Harass you with repeated phone calls, profane language, or threats to harm you.
- Make any false claim or statement that you will be arrested.
- Threaten to have money deducted from your paycheck or to sue you, unless the collection agency or creditor intends to do so and it is legal.
Work With Your Creditors
Reach out to your creditors to explain your situation. A credit card issuer may be willing to negotiate payment terms or offer a hardship program, especially if youre a longtime customer with a good track record of payments.
If your issuer offers a hardship program, it may provide relief when circumstances beyond your control like unemployment or illness impact your ability to manage payments. Whether you negotiate with your issuer or accept the terms of a hardship program, either option could lead to more affordable interest rates or waived fees, depending on the issuer.
These small changes might be just enough to help you get a handle on your debt, and the worst that can happen is they say no.
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Things To Know About Credit Card Debt Forgiveness
Edited by: Lillian Guevara-Castro
Lillian brings more than 30 years of editing and journalism experience. She has written and edited for major news organizations, including The Atlanta Journal-Constitution and the New York Times, and she previously served as an adjunct instructor at the University of Florida. Today, she edits all CardRates content for clarity, accuracy, and reader engagement.
If only it were that simple. Alas, its not.
More likely, youll have to pay at least some of your card debt, you may have to give up your card, and your credit scores will drop, perhaps even plummet.
That doesnt mean you shouldnt do it. In fact, there are sound reasons to pursue card debt forgiveness if you have debt that youre truly not able to pay. In the end, taking action could be a smart move for your finances.
Before you proceed, here are nine important things you should know.
What Is Debt Forgiveness
Debt forgiveness is a step beyond a write-off. In this instance, the lender agrees to accept a payment that is less than the full amount of what you owe. The remaining balance is then forgiven.
This is a better situation than a debt write-off because, at this point, you no longer owe the lender anything. However, that doesnt mean debt forgiveness offers a no-risk, free ride to the borrower.
For starters, the lender is likely to notify the that it settled the debt for less than the full amount. This can result in a negative notation in your credit report that will cause your credit score to dip.
It does damage credit for a period of seven years, Gupta says.
In addition, just because the debt was forgiven doesnt mean its not taxable. The IRS considers forgiven debt to be income, and youll owe federal taxes on the amount. State authorities also are likely to expect you to pay taxes on the amount of debt that was forgiven.
Your lender likely will send you a Form 1099-C, Cancellation of Debt that shows exactly how much of your debt was forgiven. The lender will also notify the IRS, so theres no way around your obligation.
While there are situations where you may not owe tax on forgiven debt, your default should be to assume that you do. If you are unsure about what you do or do not owe, talk to a tax adviser or other professional.
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Debt Relief Scams: Credit Card Debt Forgiveness Programs To Avoid
Avoid doing business with debt settlement companies that promise to settle your debt if you encounter any of these red flags:
- Pre-settlement fees
- Guarantee that they can make all your debt disappear
- They tell you to stop communicating with creditors
- They claim they can stop debt collection
- Guarantee that your debt can be paid off for minimal amounts.1
Sign Up For A Debt Management Plan
Debt management plans are offered by nonprofit credit counseling agencies that aim to help you get out of debt in three to five years. This option wont get your debt forgiven, it could help you repay your debt for less by having fees reduced or eliminated.
With this type of plan, a credit counselor will speak with creditors on your behalf in order to potentially:
- Lower your interest rates
- Have fees waived
- Stop collection calls
Although this type of debt relief program can come with a sign-up fee and monthly fee, these may be waived depending on your financial situation. Even then, your savings from completing a debt management program can outweigh the fees.
While enrolled, youll make payments to the and may be asked to close credit card accounts, though you may keep one for emergencies. The agency will handle making payments for you.
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Shady Debt Settlement Agencies
There are a lot of shady agencies ready to prey on people in crisis. Some debt settlement agencies charge money to handle tasks you could have done on your own others are outright scams that take your money without doing any work toward reducing your debt. Do your due diligence before signing up with any debt settlement, credit card consolidation or credit repair programconsult the Better Business Bureau, look for user reviews, and avoid any program that charges fees upfront.