Debt Forgiveness Agreement
The total amount of America's consumer debt is more than $2.44 trillion, giving each U.S. household an average of $15,000 in unsecured debt. To add to the problem, about 43 percent of all Americans spend more than they earn annually, according to Moneycentral.msn.com. With the debt problem rising, some consumers have looked into debt forgiveness agreements with their creditors. But like with everything in life, there are good aspects to them and bad ones.
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Benefits
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Debt forgiveness, cancellation and settlement agreements offer benefits to both consumers and lenders. For consumers, they are able to clear a debt by making a lump-sum payment for less than the total outstanding balance amount owed. According to Moneycentral.msn.com, creditors often accept between 25 and 75 percent of what customers actually owe in exchange for a one-time payment.
Forgiveness and cancellation agreements can also provide benefits for the lender. Previously, creditors and lenders would offer third-party insurance to help cover their losses in the event of bad debts. These are complicated, involve the laws of different states and offer little flexibility. On the other hand, creditors can create the terms of debt forgiveness or cancellation agreements with their customers, offering greater efficiency.
Types
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There are various types of debt forgiveness, cancellation and settlement agreements. One option is where customers make an offer to their creditor to settle the remaining debt. If it agrees to the offer, customers send a lump-sum payment to the creditor and the debt is then considered settled.
Another type is an agreement customers enter into with their lender at the time the loan is made. Creditors can offer debt forgiveness and cancellation agreements for a small fee. These types of debt forgiveness agreements are meant to take the place of third-party insurance policies that were common previously, should customers default on the loan. Typically, these are offered by the lending institution for loans; however, the option does exist with some credit card companies.
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Misconceptions
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There are several misconceptions surrounding debt forgiveness agreements. If your creditor agrees to a settlement offer, it doesn't necessarily mean that the matter is closed. Debt settlements of this type are not legally binding and the creditor still has the right to pursue the remaining portion, especially if your circumstances change. Once the debt is settled, it is noted on your credit report. However, any late payments and delinquency notes up to that date of settlement remain. Your credit score can remain damaged.
To protect yourself as much as possible, get everything in writing from the creditor. Also keep proof of your inability to pay the full amount. Once you have paid, request proof of payment. Although this may not be 100 percent legally binding, should there ever be any question you can demonstrate that you acted in good faith.
Debt forgiveness agreements also do not necessarily forgive the entire amount of debt. Debt forgiveness can mean a temporary suspension of payments, interests and penalties. It can also involve reducing the debt or forgiving a small portion of it.
Considerations
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Anyone thinking of settling debt or asking for debt forgiveness needs to give it careful consideration. Creditors do not make it easy, and to be considered for such a settlement, the customer needs to show some inability to pay. He needs to demonstrate insufficient income through loss of job, medical reasons or divorce before they will even consider forgiveness and settlement. Creditors are also very reluctant to discuss these options if someone is current on his bills. According to Moneycentral.msn.com, someone needs to be between three to six months behind on payments before they will consider settlement or forgiveness.
Consumers also need to be aware of tax laws regarding debt forgiveness. The Internal Revenue Service, or IRS, considers any debt forgiveness of more than $600 as taxable income. Parties could end up paying up to 15 percent of the total amount of forgiven debt. Tax debt is not eligible for debt settlement or bankruptcy.
Warning
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There are several companies making large promises in terms of debt forgiveness and payment reduction. Consumers need to think very carefully before entering into an agreement with a third-party agency. The credit counseling and debt management industry isn't regulated, so there are several fraudulent companies out there. Some companies charge enormous fees and pay nothing to your creditors until these fees have been paid. This leaves consumers open to further collection procedures and even lawsuits. The National Foundation for Credit Counseling can offer a list of reputable credit counseling services in your area.
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References
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