Is Debt Cancellation a Good Option?

Consumers, who are knee-deep in credit obligations, are turning to debt settlement companies to reduce the amounts they owe. Many creditors are willing to forgive as much as 60 to 70 percent of what debtors owe in order to receive at least part of the money back, because many consumers file bankruptcy when unable to pay their debts. While it may sound like a great deal, debt cancellation has certain tax ramifications for the consumers who choose to take this step.

When a creditor cancels more than $600 in debt, he is required to report it to the IRS and mail the Form 1099-C to the debtor for the year in which the debt was forgiven. Even though consumers never see this money, the IRS considers this the debtor’s income and charges tax on it. Debtors must file this form with their tax returns and pay any applicable tax on it. The IRS keeps a close eye on these forms and will come after those who fail to file the 1099-C forms and pay the tax. While a few hundred dollars may not significantly increase the tax amount due, several thousand dollars definitely will. When considering debt cancellation, a consumer should contact a tax advisor to find out how it will affect his taxes.

Debt cancellation may have other financial ramifications. Creditors may cancel a consumer’s debt and sell it to a collector. As a result, the consumer will have to pay the tax while still owing the debt. As of right now, there are no laws that prohibit creditors from doing so. Consumers may need to contact an attorney to resolve this situation.

Besides the tax consequences, debt cancellation is reported to the credit bureaus and will affect the debtor’s credit for up to seven years. The creditor reports it because the balance is not paid as agreed. In addition to the negative record, the settled accounts, including credit cards, will be closed. This will affect the credit score, because the amount of the available credit will be significantly reduced.

Most consumers are not aware of the debt forgiveness ramifications. Banks generally do not disclose the possible tax consequences when they cancel debts. Debtors need to know that accepting a debt settlement may have a negative affect on their credit and finances.

Myths About Debt Settlement

Debt settlement is also known as debt arbitration or credit reduction. A debtor and a creditor negotiate and agree on an amount which will be less than the balance due but will be considered as payment in full. Debt settlement companies advertise that they dramatically reduce the amount you. Many consumers don’t really know how these companies operate and what exactly they do. Here are the top few myths about settlement companies.

 

Debt settlement will not hurt your credit.

The truth is, it will hurt your credit. It may ruin your credit for many years. Creditors do not negotiate debt settlement with borrowers who are current on their payments. Debt settlement companies collect your payments and put them in an escrow account to make your accounts severely delinquent. It may take six to nine months for creditors to agree to negotiate a settlement. At the same time, your credit score plummets to the all-time low, the balances are sky-rocketing due to late fees and high interest charges. The creditor may also sue you and garnish your wages. If you go through the process to the end, late payments, credit settlement, and wage garnishment will be reported in your credit file for up to seven years.

 

You don’t have to do anything once the debt settlement company takes over.

Actually, this isn’t true at all. The creditor has an agreement with the borrower, not the settlement company. They may even have a policy not to work with settlement companies. This means that they will not negotiate with their representative. If you fail to take their calls and respond to the letters as the representative advises you, the creditor will sue you and start collecting debt through garnishment. Another common practice for debt settlement companies is to mail a seize-and-desist letter to creditors. This letter orders the creditors and collectors to stop calling the debtor. This action usually angers the creditors and prompts them to take legal action against him.

 

Once the debt is settled, you don’t have to worry about it.

Unless you receive an official letter from the creditor stating the settlement amount, the payment received, and that your debt is paid in full, don’t assume that it has been settled. Creditors may agree to cancel your debt and then sell it to a collection company that will attempt to get the money from you. When a representative tells you that your debt is settled, ask for a letter from the creditor stating that. Even those of you learning how to survive on minimum wage need to worry. Debt collection is an unscrupulous practice and they don’t care how little money you make.

Letting Go of the Little Things

Debt is a tough nut to crack.  It often works like fat cells, while you are young it seems difficult to acquire, but as you get older it becomes nearly impossible to shed.  There is big money in the debt industry, consider collection companies, entire departments are created on behalf of debt collection at most companies.  We also have debt consolidation companies, but profit and non-profit alike, and believe me there are many of them.  Self help gurus are a dime a dozen, most have written literature on the “best way to reduce debt” though most accomplish it by simply selling their how-to books for a ton of cash!  Sometimes giving yourself the ability to pay down debt starts with a few disciplined steps.

I love my cable television, in fact, I love the additional sports package I subscribe to each month as well.  However, I’m not in debt, and if you are, then this is something you simply do not need.  While cable tv nice, it is a luxury that some people have to realize they cannot afford.  Try sticking with the local channels, there are still plenty of quality programs, and you can save more than just a few bucks on this. 

Do you have a Costco membership? Whether you do or not, several grocery retailers sell large quantities of coffee grounds on the cheap.  I love my dunkin donuts, but that doesn’t mean I need to go and buy a cup each day.  Instead I buy a large bag of it every few months and brew it at home, just as tasty and quite a bit less costly.

If you can walk to something then please do so.  Simply put, driving wastes gas, and adds wear-and-tear to your vehicle.  This will only cost you more in maintenance and upkeep in the long run.  The area I live in isn’t the most walkable, especially during the winter, but there are times I make an attempt to jog up to the store…saves on gas and keeps me fit!

Follow these steps and you will be on your way to saving at least a few bucks each month~!

Getting a Co-Signer on a Loan

If you have bad credit, no credit or insufficient income, you may not qualify for a loan on your own. A lender will ask you to get a co-signer who meets the requirements. You can ask your spouse, a friend or a relative, as long as he or she has the necessary qualifications and is willing to co-sign a loan.

 

When considering a co-signer, choose a person with a good credit score and no recent negative information in the credit file. The lender has to see that the co-signer takes his credit obligations seriously and pays them on time. The information on your and your spouse’s report is probably very similar if you have joint loans or credit cards. If you don’t qualify due to a low credit score, your spouse’s score is within a few points of yours. In this case, he is not a good candidate for a co-signer.

 

Any negative information on your potential co-signer’s credit report may also disqualify him. If he has had a recent bankruptcy, collections or a garnishment, the lender may not approve him. Negative information remains in the credit file for seven to ten years and may affect lenders’ decisions during this time.

 

A lender may request a co-signer for a loan if your income is low. In this case, ask a relative or a friend who has had his current job for at least two years with the same employer or in the same industry. His monthly credit obligations should be no higher than 35 to 40 percent of his monthly earnings. The debt-to-income ratio requirements vary among lenders. Qualification guidelines are different for mortgages, home equity loans and student loans.

 

Before asking someone to co-sign on your loan, consider several things. The loan will be reported on your co-signer’s credit file. Any negative information—late or missed payments—will affect his credit score. If you default on your loan, your co-signer will be responsible for repaying the balance. Are you completely sure that you can afford to make the payments and to keep the loan in good standing at all times? You should not put your co-signer at risk if there is any chance that you may default on the loan.

 

 

Are Payday Loans a Good Deal?

Unlike banks, payday loan lenders don’t have strict qualifications for applicants. They tend to target people who have difficulties obtaining a loan at a financial institution. When you need to get a loan fast and do not qualify or cannot wait several days to get an approval from a bank, a payday loan may seem like a perfect solution.

 

Payday loan process is very easy to understand even if you are not financially savvy. You give a payday lender a personal check for the amount of the loan plus a finance fee and receive cash in exchange. When your next paycheck is deposited into your checking account, the payday lender cashes your personal check. If you are unable to pay the loan on that day, you can extend it for another pay period for an additional finance fee. You may pay off your loan early with cash. The finance charge may be prorated based on the number of days you had the loan.

 

Of course, a payday lender won’t give money to just anybody. You must provide the proof of income, such as paycheck stubs or bank statements showing the direct deposits from your employer. You may need to provide two or three most recent bank statements to show that your account is in good standing and has not been recently overdrawn. Loan requirements may vary by lender.

 

A payday loan may seem like a reasonable solution when you don’t have access to cash. Keep in mind that the finance charges are usually very high. Some states have adopted laws to keep the payday loan charges low, between 15 and 20 percent. Lenders in other states may charge as much as 50 percent. If you cannot pay the loan off in the first month, the charges add up and after a few months may even exceed the original loan amount.

 

If you find yourself getting payday loans every month to fill in the gap between your paychecks, you probably need help from a financial counselor. He can help you assess your financial situation, find a solution to your cash-flow problem and to create a budget that will let you live within your means.

The Dwindling Round Up: 10-17-12

Here at the Dwindling Round Up we discuss the weeks 5 best posts, in our humble opinion anyways.  With the plethora of finance sites to choose from this is no easy task.  The topics vary, however, the quality of writing does not.  Each article is well thought out, interesting in nature, and just a plain good ole read.

 

Buying and maintaining a car is a huge expense, and one that most us endure one time or another in our lives.  Making Sense of Cents tells us to buy and maintain our cars from a used dealership, stop by and see why.

When is the right time to have a baby, financially?  Ahhh yes, the age old question.  Work Save Live attempts to tackle that question in this article.  I have to say I’ve found myself asking this same question as of late.

Objective Wealth gives us some tips on how to manage a windfall!  Granted I may never experience one of these (no matter how many twinkly little stars I wish upon), but if I ever do then I will know exactly how to manage it all.

We all dream of financial freedom, but so few of us ever achieve it. See Debt Run provides us some shortcuts on how to get there.

Read up on Money Beagle’s shady bank story…there’s nothing worse than big bad companies who beat up on the little consumers…this bothers me to no end.

Grace Period on Loans

Many consumers know that their mortgages, student loans, car loans and credit cards have grace periods. However, not very many know what a grace period is and how to take advantage of it. A grace period is an extra time given to borrowers by creditors to make their payments. Payments made within grace period are not considered past due and will not result in late fees. Grace periods range in length from several days to about two weeks.

 

Most mortgages and home equity loans give borrowers 15-day grace period after the due date. For example, if your home loan’s due date is the 1st of the month, you have until the 15th of that month to pay it to avoid a late fee. Until the 15th, your mortgage is not considered delinquent. No charges will be assessed until after the 15th. As long as the payment is made within the grace period, your home loan will be reported as current to the credit bureaus.

 

Grace periods on consumer loans, such as car loans, may vary by lender. The loan contract should state the due date for the payment and how long the grace period is. Most creditors allow borrowers 10 to 15 days past the due date to make payments without penalties. Interest charges on most consumer loans accrue daily. The breakdown of your loan payment—the amount of principal and interest—will depend on how many days have passed between payments.

 

Grace periods are very different for credit cards. Consumers have a grace period of 19 to 25 days from the start of the billing cycle to pay the balance in full to avoid a finance charge. If they don’t make the payment within this time frame, they can still pay all or part of the balance before the payment due date and avoid a late charge. The credit card company will charge interest on the balance for the full billing cycle.

 

When opening a loan, read the contract details carefully. Contact the lender to clarify what the due date is and whether you have a grace period if not explained in the contract. Make your loan payments on time to avoid additional charges and late fees.