What is the Debt Relief Act?
Updated September 5, 2019 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.
Debt relief plans can help make your payments more manageable, but they're not right for everyone. It's important for you to understand how each plan or program works and how debt relief can affect your finances.
Debt relief involves consolidating or negotiating your debt to make it more affordable. Depending on your situation, you may consider debt consolidation, a debt management plan, debt settlement or even bankruptcy.
These operations often charge cash-strapped consumers a large up-front fee, but then fail to help them settle or lower their debts – if they provide any service at all. Some debt relief scams even tout their services using automated "robocalls" to consumers on the Do-Not-Call List.
If you received a Pell Grant in college and meet the income threshold, you will be eligible for up to $20,000 in debt relief. If you did not receive a Pell Grant in college and meet the income threshold, you will be eligible for up to $10,000 in debt relief.
Cons of debt settlement
Creditors are not legally required to settle for less than you owe. Stopping payments on your bills (as most debt relief companies suggest) will damage your credit score. Debt settlement companies can charge fees. If over $600 is settled, the IRS will view this debt as a taxable income.
Paying off your credit card, whether it's with a debt consolidation loan or not, does not actually cancel the card. While it does bring your balance down to zero, the card will still be open and active.
Debt settlement typically has a negative impact on your credit score. The exact impact depends on factors like the current condition of your credit, the reporting practices of your creditors, the size of the debts being settled, and whether your other debts are in good standing.
Under the terms of a debt management plan, while you may receive more favorable interest rates or relief from fees, you still repay the entire principal amount owed.
Debt relief can be a lifeline to help you get out from under unaffordable debt—but it can also damage your credit. So, if you're considering a form of debt relief, you'll want to bear in mind its effect on your credit report, where the information can stay for up to 10 years.
Does debt forgiveness hurt your credit?
Credit card debt forgiveness could hurt your credit
You stop making payments to your creditors as you save for your settlement. Creditors typically report the debt as "settled" rather than "paid as agreed" on your credit report once it's paid off. This shows that the creditor wasn't able to collect on the full debt.
Bankruptcy is your best option for getting rid of debt without paying.
Credit card debt can be overwhelming — but it can also be forgiven in some cases. If you have a significant amount of debt compared to your income, you may qualify for credit card debt forgiveness, so consider reaching out to a debt settlement company for help.
If you have loans that have been in repayment for more than 20 or 25 years, those loans may immediately qualify for forgiveness. Borrowers who have reached 20 or 25 years (240 or 300 months) worth of eligible payments for IDR forgiveness will see their loans forgiven as they reach these milestones.
In certain situations, you can have your federal student loans forgiven, canceled, or discharged. That means you won't have to pay back some or all of your loan(s). The terms “forgiveness,” “cancellation,” and “discharge” mean essentially the same thing.
Mortgage Relief Credit.
This is the equivalent of reducing the mortgage rate by more than 1.5 percentage points for two years on the median home, and will help more than 3.5 million middle-class families purchase their first home over the next two years.
Yes, you can buy a home after debt settlement. You'll just have to meet the lender's requirements to qualify for a mortgage. Unfortunately, that could be harder after you settle debt.
While it's highly unlikely that any credit card company will forgive 100% of your debt without it being part of a bankruptcy, you may be able to negotiate a settlement with your lenders in which they forgive a percentage of the balance you owe.
Despite the potential downside, settling a debt by making partial repayment is better for your credit (and peace of mind) than neglecting it and leaving it unpaid. If you ignore a debt, the creditor will typically turn it over to a collection department or third-party collection agency.
| Debt Relief Companies | Best for |
|---|---|
| Featured partner National Debt Relief | Best for credit card debt |
| Money Management International | Best overall |
| Accredited Debt Relief | Best for customized options |
| Americor Debt Relief | Best for all unsecured debt types |
Does debt settlement close your accounts?
Most debt over $600 that's forgiven is considered taxable income and you'll need to report it on your annual taxes. Debt consolidation allows you to continue using your accounts once you pay them off. That's not the case with debt settlement since the lender will close the settled accounts.
Disadvantages of a credit card hardship program
On the other hand, being in a credit card hardship program may have a temporary negative impact on your credit scores, as participation in these types of programs — as well as any missed payments —can still be reported to the three credit bureaus.
Are debt consolidation loans a good idea? Some of these loans require you to put up your home as collateral. If you can't make the payments — or if your payments are late — you could lose your home.
A debt relief order (DRO) is one way to deal with your debts if you: owe £30,000 or less - or £50,000 or less from 28 June 2024. don't own your own home. don't have other assets or things of value.
In general, if your debt is canceled, forgiven, or discharged for less than the amount owed, the amount of the canceled debt is taxable. If taxable, you must report the canceled debt on your tax return for the year in which the cancellation occurred.
