Debt elimination and debt negotiation are two strategies for helping you deal with debt problems. Each has its advantages and disadvantages, and lenders are more likely to support your efforts at debt negotiation than at debt elimination. If your debt gets out of hand, pick up the phone and talk to your lender about finding a solution.
Debt Elimination
Debt elimination, cancellation or forgiveness occurs when a lender writes off the balance of your debt, releasing you from liability. Debt eliminations are documented in contractual form and are legally binding. Lenders are reluctant to eliminate debt because they give up the chance to receive future payments from you. Instead, lenders prefer to work with customers through debt negotiation.
Debt Negotiation
Debt negotiation is the process of discussing repayment terms with your lender, according to the Federal Trade Commission. Options for revised payments terms include a reduced interest rate, moving late fees and other charges to the end of your loan, and ideally, a reduced monthly payment. Bankrate.com advises borrowers to contact lenders as soon as they experience payment problems. Let your lender know how much you can afford to pay each month, and ask if the lender can find a way to accommodate you.
Debt Negotiation Assistance
Credit counseling agencies advise you on how to negotiate with your lender, and some will negotiate for you. These solutions are helpful because they relieve some of the stress of your debt situation. However, be careful when choosing a credit counseling agency as some charge high fees or offer illegitimate services. The Federal Trade Commission advises that you find a program affiliated with your local government, a local college or Cooperative Extension Service to ensure that they offer legitimate programs with reasonable fees.
Fraudulent Debt Elimination
The Office of the Comptroller of the Currency warns consumers to be wary of companies promising to eliminate your debt. For a fee, these fraudulent schemes promise to transfer your debt to a wealthy institution that will pay it for you; offer to pay your debt in full; or claim that they can have your debt eliminated because the lender was not authorized to lend or charge interest, or the loan documents are not legal. Consumers who agree to these schemes can lose money, property and negatively impact their credit reports. If an individual or business approaches you with a debt elimination offer that seems too good to be true, it probably is.
Tax Consequences
Debt elimination is considered income for tax purposes and must be included in your taxable income, according to the Internal Revenue Service. However, the Mortgage Debt Relief Act of 2007 allows you to exclude mortgage debt eliminated or reduced related to your residence. This exception is in effect through 2012. Other forms of eliminated or reduced debt might not be taxable if you: file for bankruptcy; are insolvent when the debt is eliminated; are a farmer; or have a non-recourse loan, where the lender can only resolve your debt by repossessing the collateral.
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