Given the high standards of living in these modern times, finding yourself in debt is not a surprise. Moreover, the easy and more liberal lending policy of today as compared with the olden times has made is easier to take on a loan for any purpose if need be. Therefore, finding yourself in multiple debts is not a surprise as well.
Add to that, finding different professional sources for guidance and assistance is also not a surprise. There are several organizations, profit motive and otherwise, that will help you to manage your debts as well.
With all the above facts people now are not afraid to take on a loan and even multiples of it. However, there are several things to consider to ensure effective debt management and on time payment. Since there are different strings attached, you need to identify the right one and pull it according to draw the curtain on your ‘debt-full’ life.
Cost of debt settlement
While managing your debt there are ideally two specific ways in which you can do this. There is no third option of not paying the borrowed money back to your creditor as you are legally bound as per the loan agreement that you have signed to return it along with the pre-agreed interest within the predetermined time frame. If you choose the third option, you will have to face legal consequences for shirking your debt obligations deliberately.
Debt settlement seems to be the most favored and tempting way to get rid of existing debts in spite of knowing the dangers of debt settlement. This is because people are often excited by the fact that the amount of loan outstanding will be reduced by a considerable margin. However, there are features and factors of debt settlement which when not considered properly may make the entire effort prove costly in the end. These factors are:
- You will mostly require the help of a professional debt settlement company as your creditors will be usually least interested to negotiate with you. This will cost you time and effort in your search.
- Once you hire the service of the debt settlement company you will have to pay them service charge which is ideally a percentages of the total amount saved after negotiation. It may also be charged at a flat rate.
- There is also a risk of choosing scam debt settlement company who might even waste your time and money by not making any fruitful or desired progress and providing a proper solution leaving you in the same situation even after paying them their fees.
- Adding to all such possibilities is the tax bit that you cannot avoid. Any debt amount that is reduced or forbidden will be taxable as per the law therefore nullifying the benefits of the amount saved. Therefore, before you start celebrating thinking that you have hit the jackpot;know the true cost of having your debt cancelled.
- Dumping debt after knowing the consequences of debt cancelled or even a mortgage debt wiped out will help you to take a better decision. Understand that nothing will happen overnight and at the same time you will need to know the ways in which you can prove your creditor how much desperate you are to get a deal to put your financial health back in track.
- Once you get a deal and get a debt cancelled you will no longer have any more obligations to make further payments on it.However, to get a deal you must be generally behind on your payment schedule. You will also need to document the reasons of experiencing such financial hardships.
You may also have to make multiple attempts to get in touch with your creditor and make sure that you reach to the right person so that you get the deal you want. Once you do so and have the deal in process, make sure that you have all the necessary documents and information in hand so that you can comply with all the requests made by your creditor as quickly as you can.
Know the catch
So, the catch here is that depending on your situation, level of income and the amount of debt forbidden you will end up owing taxes on it.However, there are a few instances when your forgiven debt amount may be exempted from tax. These situations are:
- If your debts were discharged through bankruptcy
- Eligible principal residence obligation
- Having a few specific types of farm related debts or
- If there is a non-recourse loan and there is no other way than to repossess your property by the lender.
Therefore, if you want a proper outcome of your debt management plan and get some breathing room fully understand the impact and what is involved in debt settlement. Follow the Internal Revenue Service Publication 4681to get more information regarding cancelled debts.
The other way round
It seems that it is the other way round that is safer to get rid of your debts. This is the debt consolidation approach. However, once again you are recommended to know the pros and cons of it as well. Visit National Debt Relief Programs to have a fair idea about the consequences of consolidating your debt.
This is the process in which you can combine all your debts into one loan payment each month. This is a viable option for most people who are in such a financially stressful condition. However, it is essential to make sure that this specific economic commitment is just right for your financial situation and budget.
The pros of debt consolidation include:
- Simplified process – Making one payment every month eliminates chances of missed payments or losing track of your finance. This means no late fees, no interest accrued and no negative effect on your credit.
- Low interest: This loan will usually feature a low interest rate than all of your existing debts and thereby save a substantial amount of money in the long run.
On the down side, it may take longer to pay off and a strict budgeting but that does not take away its usefulness.
Kelly Wilson is an experienced and skilled Business Consultant and Financial advisor in the USA. She helps clients both personal and professional in long-term wealth building plans. During her spare time, she loves to write on Business, Finance, Marketing, Social Media. She loves to share her knowledge and Experts tips with her readers.