Debt forgiveness: Is it a trap in disguise?

By: on 2018-06-01
Ask Good Nelly
Debt forgiveness: Is it a trap in disguise?

Find out here…

Debt is like a plague that ruins our financial life slowly. That’s why it’s important to treat it as soon as possible before it’s too late. One of the ways to clear our dues is to opt for debt forgiveness. It’s known to forgive a portion of our debt, which make us save some dollars.

But, does debt forgiveness really saves us money? Or, is it a trap to fetch more dollars from us? So, before opting for a debt forgiveness program check out if it has a catch to it and how the debtors are getting affected by it.

1 You’ve to wait for long

In the case of student loan forgiveness programs like the Public Service Loan Forgiveness (PSLF), Income-Based Repayment Plan (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE), it’ll take you 10 to 25 years to get debt forgiveness. That’s quite a long time of your life that you’re investing to clear your dues.

2 Your balance grows while waiting and you pay more

When you are opting for student loan forgiveness, there are cases where your interest charges keep adding even if your monthly payments are not sufficient to cover them. This situation is known as the negative amortization where your balance increases instead of declining.

One downside of negative amortization is that you might end up repaying all your balance before even becoming eligible to receive forgiveness. Moreover, you’re paying more on interest charges for no good reason.

3 You’ve to pay tax on the forgiven debt amount

When a debt is canceled, discharged or forgiven, you’re required to pay taxes on it. Because the forgiven debt amount is considered as an income as per the IRS. In credit card debt settlement, if your canceled debt amount is $600 and more you’ll be hit with a tax bill. Expect to pay taxes on the forgiven student loan balance also.

Another bad news is that:

You’ve to pay taxes on your forgiven mortgage debt amount after 1st January 2017, which was earlier protected by the Mortgage Forgiveness Debt Tax Relief Act of 2007 (this act was applicable through the end of 2016).

A bit of good news is that:

You won’t have to pay taxes on the forgiven tax debt amount if you qualify for an “offer in compromise.”

4 You may not receive forgiveness

You are required to enroll in an income-driven repayment plan in order to receive the benefits of federal student loan forgiveness. If for any reason your financial situation gets better, you won’t be eligible for loan forgiveness anymore. You’ll have to repay the full loan balance. And, you’re likely to pay more than what you actually borrowed.

Few parting words...

Before thinking of repaying debts through debt forgiveness program, try to pay back dues on your own. Find out better ways to get rid of debts, for instance, if you’re having trouble in managing credit card debt payments, consider credit card debt consolidation.

You can meet other expenses if you free up your precious dollars from the trap of debt forgiveness. And, as I always say, you must seek professional help when required.

Over to you - What do you think? Is debt forgiveness a blessing or a trap in disguise? Fill the comments section with your precious thoughts, dear friends...

Last Updated on: Fri, 1 Jun 2018

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