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Debt Relief Programs for Every Type of Debt

Explore debt relief programs and other options so you can find the fastest, easiest way to get out of debt.

Debt relief is a broad term that covers all of the solutions you’ll find on this site. It refers to any solution that makes debt repayment faster, easier or more cost-effective. Some solutions focus on paying back everything you owe to save your credit, while others focus on providing the fastest exit possible.

This guide is designed to help you understand all your options for debt relief. If you have any questions, head over our Ask the Expert section to ask our panel of experts.

Two basic types of debt relief programs

When most people talk about finding debt relief, they’re referring to two specific types of debt relief programs. These are professional relief services that assist customers in getting out of debt. So, when you can’t get out of debt on your own, you enroll in one of these programs to get the relief you need.

Debt consolidation programs

Debt consolidation programs refer to any program that repays everything you owe so you can avoid additional credit damage. Like do-it-yourself consolidation solutions, like consolidation loans, the goal of these programs is to pay back everything you owe in full. The trick is to reduce or eliminate interest charges and fees, so you can get out of debt faster and more efficiently. However, since you repay the principal, consolidation programs usually help, instead of hurt, your credit.

Debt consolidation programs often go by different names, depending on the type of debt you need to pay off:

Pros: People usually opt for debt consolidation programs because they’re committed to repaying everything they owe. It’s good for their credit and often offers a sense of accomplishment or satisfaction for meeting your obligations.

Cons: Consolidation programs cost more than settlement because you repay the full principal and usually pay at least some interest charges. In addition, because you’re paying more, these programs also tend to take longer than settlement.

Debt settlement programs

Debt settlement programs are designed to get you out of debt quickly for the least amount of money possible. You get out of debt for a portion of what you owe, so you only pay back part of the principal. Interest charges and fees really aren’t a factor when you settle, because the goal is always to get out of debt for the lowest amount you can.

Debt settlement is also sometimes referred to as debt negotiation. If you have IRS tax debt, a settlement plan is known as an Offer in Compromise (OIC).

Pros: Settlement is all about fast and cheap. When you just want a quick exit so you can stop feeling like you’re throwing money away, you use settlement. It provides the kind of clean break you get from bankruptcy, but keeps you in charge of the negotiation instead of giving that control to the courts.

Cons: The benefit of only paying a percentage of what you owe comes at a price: credit damage. Each debt you settle creates a negative remark on your credit report that sticks around for seven years. This hurts your credit score and will make it harder to get loans and credit cards for a time. You can usually still get financing, but rates will be higher and terms won’t be as flexible until you rebuild your credit.

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Other options for debt relief

If you’re not sure you need professional debt relief services, there are other options you can use to find relief. Remember, debt relief simply refers to any solution that gives you a fast, easy or cheaper way to get out of debt. So, there are plenty of do-it-yourself options that you can consider. You simply work directly with a creditor or lender to find a solution you can afford and be happy with. Meow – meow

Deferment

This relief option allows you to temporarily suspend debt payments. With the lender’s approval, you delay the repayment schedule without incurring penalties. You also avoid creating negative items in your credit report that can decrease your score.

During deferment, interest charges still accrue on your debt except in specific circumstances. For instance…

  • If you have a subsidized federal student loan, you defer the payment until you leave school and the government pays your interest charges.
  • On the other hand, if your loans are unsubsidized then the payments are deferred but interest charges accrue. This means the amount you owe increases as you go through school.

Deferment is most common on student loans. However, deferment on other types of debt is possible, subject to lender approval. Just call your loan servicer and ask if they offer deferment if you’ve had a temporary setback and can’t make your payments.

Forbearance

This solution is similar to deferment. The lender agrees to reduce or suspend monthly payments entirely. Forbearance periods are generally shorter than deferment periods. Forbearance is typically granted by a lender if you contact them at the beginning of a period of financial hardship. If you anticipate that you can’t make your payments, you can request forbearance BEFORE you fall behind.

This type of debt relief is usually used for student loans and mortgages. Unlike in deferment, interest charges almost always accrue, even with subsidized federal student loans. However, it’s usually easier to qualify for forbearance. This can also work for other types of debt, including credit cards.

Refinancing

While deferment and forbearance change your payment schedule for a period of time, refinancing permanently changes your loan. The primary goal is to lower the interest rate applied to your debt. It may also provide other benefits in some circumstances, such as lower monthly payments.

Lowering the interest rate applied to your debt allows you to save significant money over the life of your loan.

  • You can refinance mortgages auto loans and private student loans, qualifying for a new rate based on your credit score. When you refinance a mortgage, keep in mind that you generally must pay closing costs again.
  • There is no federal program to refinance student loans; you must go through a private lender to refinance student loans
  • If you lower the interest rate on a credit card, this is known as interest rate negotiation.

Refinancing is only the right choice if you can qualify for a lower rate. This usually means that you need a better credit score than when you financed originally. Also, keep in mind that things like a strong economy affect rates because the Federal Reserve raises the benchmark rate.

Loan modification

Like refinancing, loan modification permanently changes the terms of a lending agreement. While refinancing reduces the interest rate, modification can change the principal loan amount or the length of the loan (term). You can also switch from an adjustable interest rate to a fixed rate. In most cases, you modify a loan to better match your needs as a borrower and to achieve lower payments.

The most common type of loan that you modify is a mortgage. If your home is worth less than your remaining mortgage balance, modification matches the principal to the property value. Modifications were common after the mortgage crisis in 2008. However, as of January 1, 2017, the federally subsidized modification program HAMP ended. That means modifications are much less common now.

Consolidation loans

Debt consolidation loans are how you consolidate debt on your own. You roll multiple debts into a single monthly payment at the lowest interest rate possible. You do this by taking out a new loan in an amount that’s large enough to pay off your existing debts. This leaves only the new loan to repay.

Much like refinancing, the success of using consolidation loans often hinges on having good credit. You need to be able to qualify for a loan that provides a lower rate (and usually lower monthly payments).

There are two main types of consolidation loans:

  • Most debts can be consolidated with a personal debt consolidation loan. That includes credit card debt, medical debt, auto loan debt, and even IRS tax debt.
  • Student debt usually requires specialized consolidation loans.
    • You can use a Federal Direct Consolidation Loan to consolidate federal school loans. However, this consolidation loan is really meant to make sure more of your federal loans are eligible federal student loan repayment and forgiveness programs; it does not lower your interest rates
    • If you want to lower the rates applied to student loans, you must use a private student debt consolidation loan.

Debt forgiveness

True loan forgiveness (also called debt forgiveness) means your debt is cleared without penalties. It’s a full discharge of your remaining balance that doesn’t require a full or partial payment. Once you meet certain eligibility requirements, a debt is forgiven without any credit penalties.

As you can imagine, this is pretty rare. The most common type of forgiveness applies to federal student loan debt. But you must be in the military or in a public service sector position, such as nursing or teaching, to qualify.

There is tax debt forgiveness, but only in the case that you can prove you are not legally responsible for the debt. This happens in Innocent Spouse status cases, where you prove your spouse incurred tax debt without your knowledge.

Workout arrangements

A workout arrangement is a repayment plan that you set up with an individual creditor. This relief option only applies to credit cards. If you’re falling behind and you’re headed for a charge-off, the creditor may agree to arrange a repayment plan that you can afford.

In most cases, the creditor will freeze or close the account. Then you repay the balance you owe. In some cases, they will agree to “re-age” your account. That’s when the creditor revises their report to the credit reporting agencies (credit bureaus) to remove late payments and bring your account current. This alleviates credit damage.

Settlement agreements

This type of relief is similar to a debt settlement program because you settle the debt for less than you owe. However, a settlement program handles multiple debts at once through a settlement company. You negotiate settlement agreements on your own with individual creditors or collectors.

Basically, if you do the negotiation yourself or accept a settlement offer you receive from a collector, it’s known as a settlement agreement.

Voluntary surrender

Voluntary surrender involves giving up property attached to a loan to get out of the loan agreement. The term “voluntary surrender” specifically refers to giving up a vehicle to get out of an auto loan. It’s also called voluntary repossession.

There is also a voluntary surrender option that you can use to avoid a mortgage lender foreclosing on your home. It’s called a deed-in-lieu of foreclosure. This was a common relief option for homeowners to use after the mortgage crisis in 2008. Many lenders offered “cash for keys” programs that allowed homeowners facing foreclosure to get out and make a clean break.

Keep in mind that voluntary surrender doesn’t mean that you won’t face credit damage. You still didn’t meet your obligation to repay the loan, so it negatively affects your credit.

You may also face deficiency judgments. Voluntary surrender allows the lender to sell the property to recoup their losses. But if the sale doesn’t cover the remaining balance that was left on your loan, the lender has the right to sue you to collect the difference.

Bankruptcy

The final option you can take for debt relief is to file for bankruptcy. Bankruptcy provides relief by discharging most (not always all) of your debt. Chapter 7 bankruptcy is usually the faster option, because it liquidates any available assets, so you can make a clean break quickly. Chapter 13 bankruptcy sets up a repayment plan that you can afford to pay back at least a portion of what you owe in exchange for discharge.
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The best relief option for every type of debt

Credit card debt relief

There are a wide-range of options available for people who need to find relief from credit card debt. The good news is that most of these programs are voluntary and very flexible. So, if you try do-it-yourself solutions and they don’t work, you would still be eligible for professional assistance.

Do-It-Yourself Relief OptionsRelief Services
ForbearanceDebt consolidation program
Interest rate negotiationDebt settlement program
Balance transfers (credit consolidation) 
Personal consolidation loan 
Workout arrangement 
Settlement agreement 

 

For the most part, credit users usually opt for the do-it-yourself solutions first. However, as high balances push you deeper into debt, it becomes harder and hard to solve these issues on your own. So, many people often end up needing professional help. There are two main services you can use:

  • If you’re mostly current with your payments and don’t want to damage your credit score as you get out of debt, call a consumer credit counseling agency
    • These agencies run debt management programs, which are debt consolidation programs specifically designed to eliminate unsecured debt.
  • If you’re already behind and most of your debts have been charged off and sent to collections, call a settlement company.

 

Debt Relief Options

There are many debt relief options and two popular solutions are debt management programs and debt settlement plans. A common misconception is that they are the same thing.

But they are actually two very different types of solutions.

A debt management program, or DMP as it is commonly referred to, is the relief option where you pay back your principal in-full but your interest rates are reduced or even eliminated.

You only have one payment to make each month, instead of several. And your credit score stays intact and may even improve while on the program.

The key to a successful debt management program is that more money goes to eliminating the principal while high interest rate charges end.

In comparison, with a debt settlement program you don’t pay back everything you owe.

A debt settlement specialist negotiates with your creditors with the goal of getting them to sign off on a settlement offer, where they agree to reduce your principal so you only pay a portion of the original amount.
Once they agree to the debt settlement, the creditor receives their money from what you set aside in a ‘program savings account’.

After you complete a debt settlement program, you will enjoy freedom from debt but it may take a few months to a few years to rebuild your credit rating, depending upon your unique situation.

To find out which option is better for you fill out our form or better yet, call us now. We’ll match you with the best solution for your situation, for free. We’re A-plus rated by the Better Business Bureau and have helped thousands of people become financially stable.

So, don’t struggle any longer, give us a call. When life happens, we’re here for you.

It’s worth noting that all of these solutions for credit card debt also apply to other unsecured debts. This means you can often use the same solution to solve issues with medical debt, unsecured personal loans, and even payday loans.

If you try all the solutions listed above and still can’t get out of debt, then it’s time for bankruptcy. Credit card debt and other unsecured debts are usually fairly easy to discharge during bankruptcy. So, if you have a lot of unsecured debts on your plate and just need a clear break, bankruptcy may be the way to go.

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Student loan debt relief

There is a wide range of options available for student loan relief. Which options you use often depend on what type of student loan debt you hold – federal or private.

Relief options for federal student loans that don’t affect eligibility for other federal relief programs:

  • Deferment
  • Forbearance
  • Deferment
  • Federal Direct Consolidation loan
  • Federal repayment plans
  • Public Service Loan Forgiveness

Private student loan relief options:

  • Student loan refinancing
  • Private student loan settlement

It’s important to note that you can use private student loan refinancing to refinance federal student loans. However, this converts federal loan debt to private, which means you lose eligibility for all federal relief options moving forward.

Also, keep in mind that the discharge of student loans through bankruptcy is not as easy as the discharge of other types of debt. In order to discharge student loans, you must prove that not discharging those debts will cause you continued financial hardship. It’s possible to discharge these debts through bankruptcy. But it’s not always easy and you generally need a good attorney on your side to get the results you want.

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Tax debt relief

Finding the right relief option for tax debt is critical because there is no statute of limitations on how long the IRS can hunt you down. The IRS also has broad collection powers that don’t require court orders. They can garnish your wages, intercept your tax refund, place liens on your property, and levy bank accounts – all without suing you in civil court. So. if you have tax debt, you need to find relief as quickly as possible.

Tax debt relief options tend to have special names for each program:

  • Deferment = Currently Not Collectible (CNC) status
  • Consolidation / Repayment Plan = Installment Agreement (IA)
  • Settlement = Offer in Compromise (OIC)
  • Interest Rate Negotiation = Penalty Abatement

Penalty abatement often goes hand-in-hand with other options. That’s because IRS penalty interest can go as high as 25%, depending on which penalties you incur. That kind of high interest charge adds up quickly, making your debt grow just as fast. Often the key to getting out of debt is to reduce those penalties. This usually requires the help of a certified tax resolution specialist or CPA.

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Mortgage debt relief

Problems with mortgage debt don’t just affect your credit and finances, they can have a very real impact on your life, too. Foreclosure could mean that you’re forced to uproot your family and scrambling to find housing. The good news is that there are plenty of options available to homeowners who are struggling to keep up with their payments. You generally have two paths that you can take when you’re having trouble. The first path is to prevent the foreclosure entirely. The second path is to make a quick and graceful exit if you can’t avoid foreclosure.

Relief options that prevent foreclosure:

  • Forbearance
  • Refinancing
  • Workout arrangement
  • Loan modification

Relief options for a fast exit:

  • Deed-in-lieu of foreclosure
  • Deed-for-lease
  • Short sale

Deed-for-lease is similar to deed-in-lieu of foreclosure, except you end up staying in the home as a leasing tenant. This is a good option if you have kids in school that need to finish a semester before you move. In both cases, you’re basically voluntarily surrendering your property.

A short sale can also be a good option for a fast exit. You basically end up selling the home for less than the remaining balance owed on your mortgage. So, the mortgage lender takes a loss on the sale. If the lender approves a short sale before you do it, it’s called an approved short sale. But even if they approve the short sale, they still reserve the right to pursue you for a deficiency judgment.

It’s important to note that any voluntary surrender or short sale would result in the same type of credit damage caused by foreclosure. Foreclosure creates a 7-year negative remark on your credit report that negatively affects your score. But short sales and cash for keys have a similar 7-year penalty.

Auto loan debt relief

Auto loans are usually not the debt that sends you into financial hardship. But if you’re struggling with other types of debt, then you may have trouble keeping up with the payments. In this case, these are the options you generally use:

  1. Forbearance
  2. Refinancing
  3. Auto loan consolidation
  4. Voluntary vehicle surrender

The first three of those options won’t hurt your credit, but the last will. It’s basically equivalent to repossession.

Payday loan debt relief

If you’re in trouble with payday loans, then settlement is usually the way you want to go. These debts carry interest rates of 300% or higher. That means finance charges stack up quickly. Your best option is often to settle for percentage of what you owe.

That being said, if you only have 1-2 payday loans and the bulk of your debt problems come from credit card debt, you may be able to include your payday loans in a debt management program. This will consolidate the payday loans with your other unsecured debts. As a result, you can stop all those Direct Debit transfers that are draining your accounts and likely causing overdraft fees.

On the other hand, if the bulk of your issues are with payday loans, then you need a debt settlement program.

Medical debt relief

Out-of-pocket medical expenses that don’t get paid turn into medical debt collections. You may not even be aware that you owe anything until you start receiving collection notices. This can happen due to gaps in insurance and other health coverage issues that often arise. These issues are why medical debt collections are now a leading cause of bankruptcy in the U.S.

If you have medical debts in collections, debt settlement is usually the best option. You can either settle with the collection agency or go back to the original service provider. In some cases, the service provider may be willing to help you set up a repayment plan and then they’ll cancel the collections.

Medical bills can be rolled into a debt management program, but only if you have credit card debt to consolidate as well. You can’t use a debt management program solely to consolidate medical debt collections. But most credit counseling agencies will be willing to help with medical collections if you’re already enrolling in their program.

Still, bear in mind that medical collections don’t have interest charges applied. So, you lose one of the main benefits of a debt consolidation program because there is no interest rate to reduce. That’s why settlement is usually the best option because you simply want a fast exit for the least amount of money possible.
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5 tips for finding a trustworthy debt relief company

Tip No. 1: Check the BBB

All debt relief companies should be rated by the Better Business Bureau. You want any company that you work with to be rated by the BBB, preferably with a rating of A or A+ that’s been maintained over a number of years.

But if you hit a company’s BBB page to check their rating, don’t just check the letter grade. While you’re there, see how many complaints that they have and how those complaints were handled. Keep in mind that any business that’s been around for a while is almost certain to have at least one or two bad customer experiences. But it’s how they handle those experiences that you want to know because if things go wrong, you want a company that will do everything they can do to make it right.

Also check to make sure the company is not tied to any organization that’s the subject of a class action lawsuit by a state Attorney General’s office. Class action lawsuits are usually not a good sign of a company that does right by their customers.

Tip No. 2: Ask the Internet

There are good ways and bad ways to use the Internet to check into debt relief companies. Bad is simply going to the company’s website and trusting whatever they tell you. Good is going to independent third-party review sites to get the real scoop. That’s because most companies will cherry-pick their best customer testimonials for their website. They’re not going to show you the bad, only the good.

So, you want to go to websites like:

  1. Consumer reports
  2. Ripoff report
  3. TrustPilot

Look for sites that specifically say that they are independent and don’t do things like take compensation to remove negative reviews. Be careful, because some review sites aren’t independent. They basically positively review people that pay them and negatively review anyone that doesn’t. That’s hardly an accurate reflection of the service you can expect.

Tip No. 3: Make sure the company is accredited

Often times, debt relief providers are either accredited by a specific trade association or approved by a government agency. Both are good signs that a company you want to work with is reputable.

Trade associations are cooperatives of businesses within a certain industry. To be a member of a trade association, a business usually has to live up to a high ethical standard. So, for instance, credit counseling agencies may belong to the National Foundation for Credit Counseling or the Association of Certified Debt Management Professionals. Debt settlement companies have the American Fair Credit Council. These associations mean that the company must live up to a minimum ethical standard. In other words, you can have at least some peace of mind that the company will provide the service that they say they will provide.

Government agency approval is also a really good sign of a reputable company. For instance, if you need mortgage debt relief, find a HUD-approved housing counseling agency. The HUD approval means that the housing counselors getting special training and must adhere to certain standards.

Tip No. 4: Be wary of companies that charge upfront fees

Almost any relief option you use will have a cost. Even if you get a loan on your own to consolidate, you’ll likely pay fees to set that loan up; then you also pay the interest charges on the new loan. So, if you work with a debt relief company, it’s reasonable to expect that there will be some fees involved for using their service.

What you want to avoid are any fees that a company charges front without a money-back guarantee. If a company wants to charge exorbitant fees to set up a program without any guarantee, they can take your money and run.

So, a company should either not charge any fees upfront until they perform at least some part of their service OR they should offer a money-back guarantee. If you’re supposed to pay big upfront and then just have faith that they’ll do what they say, walk away.

Tip No. 5: Get a good feel from your initial consultation

Most debt relief services offer a free consultation. That way, they can see if their service can actually help you, given your current debt, credit, and overall financial situation. But outside of finding out if you’re eligible, you can use these consultation calls to get a read on the companies you contact.

Make sure that you feel comfortable and confident after the consultation. If they leave you with more questions than answers, or you have a sinking feeling that something is wrong, don’t move forward! Trust your gut instinct and only work with someone that engenders trust in you.

And always keep in mind, these consultations are usually offered for free with no obligation. So, although the representative may try to push you to sign up right then, there’s no requirement to do so. You can thank them for their time, hang up and take time to consider what you want to do. You should never feel rushed or pressured into making a decision.
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Government debt relief programs

There are times that the federal government steps in to help consumers who are struggling with a specific type of debt. These programs usually have a limited lifespan – Congress will set them up during a crisis and continue to renew the programs until most consumers have recovered. Many of the programs you see outlined below were started around the housing crisis of 2008 and the Great Recession of 2009.

Federal student loan repayment plans

The government offers eight different plans that make it easier or more efficient to repay federal student loan debt.

There are two plans that are designed for borrowers that want to get out of debt as quickly as possible:

  1. Standard repayment plan
  2. Graduated repayment plan

The other seven repayment plans are designed for borrowers that are having trouble making their payments:

  1. Extended repayment plan
  2. Income-based repayment (IBR)
  3. Income-contingent repayment (ICR)
  4. Income-sensitive repayment
  5. Pay as you earn (PayE)
  6. Revised pay as you earn (RePayE)

These programs consolidate eligible federal student loans into a single monthly payment. If you have federal loans that don’t qualify for these programs, you can use a Federal Direct Consolidation loan to consolidate your loans so that more of your debt is eligible for relief.

And if that seems like an overwhelming number of options, then be patient. President Trump proposed that Congress should reduce the number of plans from eight to three, to make things easier. But for now, you can ask your federal student loan servicer for more information about which plans are right for you.

Public Service Loan Forgiveness (PSLF)

This program offers penalty-free student loan forgiveness to people who work in a public service profession. This program was started under President Bush, but it was overhauled by President Obama so that more people could qualify. That’s why some people think it’s called Obama Student Loan Forgiveness.

In order to use this program, you must enroll in a hardship-based repayment plan first – that’s an ICR, IBR, PayE or RePayE plan. Then you must make payments for 10 years while you work in an approved public service profession. Then the government forgives the remaining balances on your loans without penalties.

The Department of Education revised their rules for employment certification, rolling back the Obama-era expansion of PSLF. They have talked about making even bigger charges to the program, which could limit the amount of debt forgiven or who can qualify.

Fresh Start Program (aka Fresh Start Initiative) for IRS tax relief

In 2013, the IRS created the Fresh Start Program. Its purpose was to make it easier for taxpayers that had fallen behind to pay off their back taxes. This provides immense relief since it stops things like tax liens and wage garnishment.

Here is what the law provides:

  • Fresh Start increases the amount of tax debt you owe before you trigger a Notice of Federal Tax Lien. Now if you owe less than $10,000, you don’t need to worry about liens.
  • Fresh Start also made it easier to file an Installment Agreement if you owe less than $50,000. You can use the streamlined online application and you can skip the full financial statement usually required to set up an IA
  • Fresh Start also expanded and improved Offer in Compromise access. The IRS is more relaxed now in evaluating taxpayers’ ability to repay back taxes. Now it’s easier to qualify for an OIC

Home Affordable Refinance Program (HARP)

After the mortgage crisis in 2008, the Federal Housing Finance Agency (FHFA) authorized two programs to help homeowners – HARP and HAMP. One program (HARP) was designed to help homeowners who needed to refinance their mortgage. Many homeowners were caught in adjustable-rate mortgages at the start of the crisis. Switching to a fixed rate, especially at the low rates available during the recession, often provided significant relief.

HARP has been extended by Congress several times, most recently through the end December 2018. Through the HARP program, you can:

  • Get a lower interest rate, which would also lower your monthly payments
  • Get a shorter loan term, so you can get out of debt sooner
  • Switch from an adjustable-rate mortgage to a fixed-rate mortgage

HARP offers other advantages over traditional refinancing through a private lender. You can refinance even if your home is underwater – that’s when you owe more on your mortgage than the home is worth. You also have fewer fees, no appraisal and no underwriting to go through. So, it’s easier and much less of a hassle to qualify.

Every time Congress renews HARP, they warn it’s the last time they plan to renew it. So, it’s best to go ahead and see if you’re eligible before December 31, 2018. Otherwise, you could miss out.

Mortgage Forgiveness Debt Relief Act of 2007 extended into 2018

The name of this program often confuses people. They think there’s some kind of program where the government forgives mortgage debt. But that’s not what the program is designed to do. Instead, it ensures that debt canceled by a mortgage lender on the sale of a primary residence is non-taxable.

Basically, this law is designed to prevent people from being forced to pay taxes after problems with their mortgage. If part of your debt is canceled by a lender, by law you usually must pay income taxes on the canceled debt. The only way to avoid paying taxes is to file for an exclusion.

Around the time of the mortgage crisis, Congress created the Mortgage Forgiveness Debt Relief Act of 2007. This act automatically qualifies homeowners for the income tax exclusion if they have canceled debt on the mortgage of their primary residence.

So, let’s say you have a short sale on your home. You sell the home for $50,000 less than the remaining balance on your mortgage. In normal circumstances, that $50,000 would be treated as taxable income. But, as long as you fill out Form 1099-C and the amount forgiven is less than $2 million, you qualify for the exclusion.

The program has also been extended through 2018. No word yet on whether it would be extended again into 2019.

Is there a government program for credit card debt relief?

No. The government does not have any relief programs that forgive or repay consumer credit card debt. There are, however, several ways that the government regulates credit card debt relief programs:

  1. The FTC regulates debt relief companies to make sure they provide services as advertised.
  2. The government created the Advance Fee Ban to ensure consumers receive help before they pay fees.
  3. The FTC also oversees nonprofit consumer credit counseling agencies that provide debt management programs.

Nonprofit credit counseling agencies are granted 501c(3) status but must provide impartial help. In other words, a consumer credit counselor must review all a consumer’s options for debt relief during a consultation. They must only recommend a solution if it’s the best to use in that consumer’s unique financial situation, even if that solution is not to enroll in a debt management program with the credit counseling agency.

These agencies are funded by grant money in order to provide low-cost relief options to consumers. That’s how credit counseling agencies can keep debt management program fees low and still provide their services. However, the grants these agencies receive are not federal grants. They are private grants received from credit card issuers.
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How does debt relief affect your credit?

The effect of seeking debt relief on your credit score depends on which relief option you end up using. Any solution that pays back everything you borrowed in-full should have a neutral or positive impact on your credit score. Reducing interest charges or eliminating fees should not cause any credit damage. On the other hand, a solution that gets you out of debt for less than the full amount owed on the principal will damage your credit score.

So, refinancing will not damage your credit if you make all the payments as scheduled on the refinanced loan. That same is true of a debt consolidation loan or a modified loan. Negotiating a lower interest rate on a credit card will also not have any negative effect on your credit. Deferment and forbearance also do not negatively affect your credit, because the creditor agrees to suspend or accept reduced payments.

The impact of workout arrangements and credit card debt management programs is usually neutral or positive. These solutions help you avoid missed payments and build a positive credit history.  So, most credit users don’t see any damage to their credit using these solutions. However, it’s worth noting that these options close accounts. This can have a slight negative effect on your credit, but the damage is usually nominal.

Solutions like settlement, short sales, and voluntary surrender all damage your credit. You will incur a seven-year negative remark on your credit report for each of these. Foreclosure and Chapter 13 bankruptcy also incur a seven-year credit report penalty.
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Bad ideas for debt relief

You might think things like settlement and bankruptcy would be bad ideas for debt relief. But even though those solutions may damage your credit, they are still viable solutions for finding relief from debt. When you declare bankruptcy, you make a clean break from debt, so you can move forward in a positive way.

On the other hand, there are several options that people use that put them in a weaker financial position than when they started. These solutions increase your risk or hurt your assets, meaning that even though they wipe out your debt, they put you further behind. If possible, you want to avoid these kinds of solutions.

Tapping home equity

Home equity loans, Home Equity Lines of Credit (HELOCs) and cash-out refinancing use home equity to provide debt relief. You basically borrow against the equity built up in your home to pay off other debts. This can seem like a viable solution, especially because a borrower with a weaker credit score can qualify for a lower interest rate when a loan is secured using their home as collateral.

But these options significantly increase your financial risk. If you default on any of these options, you could be at risk of foreclosure. This means you could lose not only your most valuable asset but your housing, too.

In general, you want to leave home equity alone. It’s often the largest asset you have for building positive net worth. When you borrow against equity, you turn an asset into a liability. (Literally, net worth is calculated by taking total assets minus total liabilities – i.e. your debts.) That will be a problem when you go to open a new loan because your assets to liabilities ratio won’t be where you need it to be. So, your solution to avoid hurting your ability to borrow can actually make it harder to borrow.

Using retirement funds

Tapping your 401(k) or IRA to borrow money so you can pay off debt is also not recommended. You lose not only the funds you take out but the growth you would have enjoyed on those funds until they are replaced. You can potentially set your retirement back by years or even decades if you borrow against these funds.

In addition to draining your retirement funds, you also face early withdrawal penalties if you take out money before the age of 59½ on a 401(k) or traditional IRA. The penalties for early withdrawal are 10% of the money you take out. In addition, you may also be required to pay taxes on the money you withdraw, since it’s considered taxable income. These penalties and taxes do not apply to a Roth IRA.

Still, the amount of time and savings that you set back by making an early withdrawal can’t be understated. You could be forced to delay your retirement or work part-time through retirement if you drain your funds now.

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Article last modified on September 14, 2018. Published by Debt.com, LLC . Mobile users may also access the AMP Version: Debt Relief Programs for Every Type of Debt - AMP.