Many homeowners find themselves swimming in a pool of financial strain. While the mortgage is typically the largest debt obligation a person has, often, it is not the only financial burden keeping a borrower up all night. Mounting credit card debt, outstanding medical bills and even unpaid taxes are some common sources of stress and can contribute to the feeling of a heavy weight on someone's shoulders. The combination of these debts along with an upside-down home can leave a borrower distraught.
The thought of filing bankruptcy is horrifying for many people and they begin to seek for alternatives. But what can you do if you have fallen behind or have stopped making regular payments? Harassing phone calls, threatening letters and other tactics are used by the creditors to encourage borrowers to pay. Depending on the circumstances, it is possible to stop the stress, phone calls AND avoid bankruptcy.
In many cases, these debts can be settled with creditors for less than the full balance due.
Many credit card companies, collection agencies and other creditors are willing to agree to a plan to help the borrower settle the outstanding debt in either a lump sum cash settlement or in a modified payment plan. The creditors are hopeful that they will recover more money than if the borrower files bankruptcy. Commonly, a creditor will agree to accept a reduced balance of the total outstanding, and typically, the largest savings is offered if one payment is made. Sometimes, a creditor may allow a settlement to be paid over 3 monthly installments. Tax refund checks, holiday bonuses or loans from family are common ways that borrowers obtain the cash to offer the settlement payment.
Some concerns with debt settlement to consider are the negative impact on your credit score, closing of the credit card, potential filing of lawsuits or account settled and potential income tax consequences. When a debt is settled, the creditor generally reports that to the credit bureaus as "settled in full for less than balance" or similar verbiage. This reporting does decrease your credit score and will be considered by a potential lender in future borrowing decisions. However, this impact is much less than a bankruptcy filing.
Typically, the creditor will close the account as part of the agreement to settle the debt. Many borrowers find that when they are not making such high monthly payments to the creditor, they can afford their monthly expenses without using a credit card. For the first time in a long time, they find themselves paying cash for groceries, gas and utility bills. This is often the beginning of the feeling of financial freedom that they were searching for!
As with any short sale or debt settlement, potential tax consequences must be considered. If a lender chooses to release a borrower from some, or all, of an outstanding loan obligation, it is required to issue a Form 1099-C which reports the cancellation of debt. Not only does the lender have a reporting obligation, but the borrower must also report this liability on their tax return for that year. (Article: Know the Difference between a 1099-A & 1099-C)
It is important to keep in mind that every creditor is different and every settlement will be analyzed individually. If you have questions or are interested in learning more about debt settlement, contact us today.
