What Are Your Debt Relief Options?
No matter what, your bills arrive every month, and whether you’ve lost income because of COVID-19, or had a recent health crisis and incurred more debt, your financial obligations remain. If you are beginning to feel crushed by them, it’s time to explore debt relief possibilities. What are your debt relief options? In this post, we’ll explore a number of them.
COVID-Caused Hardship Relief
Although Congress has not passed another stimulus bill yet, the suspension of payments for student loans has been extended until 2021. You don’t need to do anything; direct withdrawals from your account will not occur and you will not accrue interest during this time. Many credit card companies and other lenders have also independently adopted programs to help those struggling due to the pandemic. These include loan extensions, reduced interest rates, and deferred repayments. In order to receive this kind of hardship relief, you may need to prove your hardship with documentation, and there may be other consequences including having your credit card frozen or your account closed. If your difficulties are directly due to COVID-19 and you can see that your situation will improve when the pandemic abates, these may be good options for you to pursue.
A debt consolidation loan combines multiple debt payments into one monthly payment. That monthly payment is often lower than the individual payments combined, and the interest you pay is often lower as well. You will maintain your access to credit, though incurring more debt increases the likelihood of the debt consolidation failing. If the debt consolidation loan is secured, then you risk losing your collateral, usually your car or other significant tangible property. One thing, in particular, to beware of is cross-collateralization. If your loan contains a cross-collateralization clause, you may find yourself losing something you didn’t know you were risking. A cross-collateralization clause lets the lender take other property it has financed if you default on the debt consolidation loan. For example, if you get your debt consolidation loan through the same bank that financed your car, under the cross-collateralization clause, if you default on the debt consolidation loan, the bank could repossess your car—even if the car payments are current.
Debt Management Plans
Some people go to an agency that creates a debt management plan for them and negotiates with the credit card companies on your behalf. It’s important for you to know that agreeing to a debt management plan comes with a number of hidden costs – monetary and otherwise. You will be expected to pay an enrollment fee as well as a monthly fee for each credit card on the plan. Also, most credit card companies will require that an account entering into a debt management plan be closed, so you lose your access to credit. And the fact that you’re engaged in a debt management plan will be noted on your credit report. Most debt management plans run for three to five years (the same time frame as Chapter 13 Bankruptcy), and at least half of clients do not successfully complete the plan.
Negative Tax Consequences
Depending on your financial condition, any money you save from debt relief services such as debt consolidation may be considered income by the IRS, which means you pay taxes on it. Credit card companies and other creditors may report settled debt to the IRS, which the IRS considers income.
There are two types of bankruptcy you can pursue: Chapter 13 and Chapter 7. Chapter 7 is means tested, so you need to make no more than your state’s median household income ($67,355 for Wisconsin – 2019). If you qualify for Chapter 7 bankruptcy, your unsecured debt can be completely eliminated. The whole process takes about four months, and then you can start over with a clean slate. While it is known as “Liquidation” Bankruptcy, there are exemptions, and most people keep their car and house. Chapter 13 bankruptcy works by having a court approved agreement negotiated between creditors and debtors. There are no income ceilings to qualify for Chapter 13, and the moment you file, there is an automatic stay on all collection action. Chapter 13 bankruptcy agreements generally last from three to five years.
If you need debt relief, contact the experts at Burr Law. We will talk you through all of your options and help you decide what is best for your specific situation.