There are many ways you can either reduce or cancel your debt. No matter the source – excessive credit card bills or student loans, it is possible to cancel your debt. In many cases, however, tax payment is compulsory on the canceled amount. In addition, there are some strict guidelines before you can merit some debt forgiveness programs.
As a result, you need to understand the options before pursuing a debt cancellation program and understand the tax consequences.
Strategies to Get Your Debt Cancelled
The first step is to critically examine your entire debt and have a timeline to complete the payment. This will help open your eyes to management strategies for the debt. Then, with meticulous strategizing, it might be possible to get your debt in check.
It is also possible to renegotiate the terms of the debt, which is more achievable compared to complete debt cancellation. People with issues making their loan coverage, for instance, might work with their provider to reduce the monthly payment, interest, or principal using the mortgage modification.
We understand that loan terms adjustment might not spark so much interest. It, however, can be a good option when the cancellation of debt is not feasible.
Also, be sure that the statute of limitation is still valid for any debt you want to repay. With time-barred debt, the lender will not be able to sue you for collection while they will keep trying to get across to you via calls and mail.
As long as you are aware of the scope of your debt and you are still owing, here are further options you can explore to cancel some common debt types.
Settling Your Credit card Debt
You can contact your creditors and negotiate your debt, since many creditors will desire to work with you if you are already behind on payment. However, when you cannot make full payment, they will likely consider the option of settling for less.
This, however, might involve paying the creditor a huge sum, which is a percentage of the debt amount. Therefore, when negotiating, be sure you know what you can afford and ask the creditor to note the debt as paid in full and not settled.
For creditors that are not open to negotiation, consider other avenues like debt management, debt consolidation, and bankruptcy to manage your credit card debt.
Tax Consequences
According to Uncle Sam, any debt canceled is considered income, and the implication is that it needs to be reported the year it was canceled. So you would get a 1099-C if $600 or more were canceled from your debt.
Your income for the year will not carry the canceled debt even though Uncle Sam considers you insolvent – a situation in which your debt exceeds your asset. The IRS has an insolvency worksheet to determine if your debt meets the criteria.
Settlement of Tax Debt
Huge tax debt can be a headache, which will keep expanding if you do not pay when you consider the interest and late penalty fees. You can consider installment payment or tax debt relief from Uncle Sam.
For people that can afford to pay their tax debt within 120 days, Uncle Sam will disqualify you from the settlement of the tax debt. Other options you have are:
Short-term payment option: You get nothing more than 120 days to settle your tax debt with this. It has no setup charge, but the fees and interest keeps accruing until you pay the entire amount.
Long-term payment plan: for people that need over 120 days, there is the option to set up an agreement with Uncle Sam. You can consider automatic withdrawal that you will set up online.
Forgiveness for Student Loan
Your qualification for student loan forgiveness is a matter of the nature of the loan you have. Private student loans offered by online lenders, banks, and credit unions are usually challenging to cancel. However, you can get a loan modification program from some online lenders to reduce your monthly payment for some time.
On the other hand, there are several forgiveness programs for Federal loans. Your qualification is a matter of your job in many cases.
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