Under a mountain of debt but afraid to do something about it? You’re not alone. A recent survey of 1,000 consumers from Comet found that approximately 80 percent carried debt. This is relatively consistent with past years’ reports, combined with 2016 data that showed 73 percent of Americans passing away with debt. The average debt was over $62,000, or just under $13,000 excluding mortgages.
Living with debt might seem easier to do, but do you really want to owe money all your life? Below we’ll look at the viability of debt relief, how it affects credit scores, taxes, your actual debt and more.
What Is Debt Relief?
Debt relief can include several strategies. Popular strategies include debt management, debt consolidation, debt settlement and bankruptcy.
How Does Debt Relief Affect Credit Scores?
Plans like debt management and debt consolidation may be able to help you improve your credit score. Debt management will show consistent progress toward your debt amounts on your credit report while debt consolidation can pay off your outstanding balances while opening new credit at the same time.
Strategies like debt settlement and bankruptcy will negatively impact credit scores. Declaring chapter 7 bankruptcy can stay on a credit report for up to a decade while chapter 13 and debt settlement can remain for up to seven years. An important thing to keep in mind though is that to be considering debt settlement or bankruptcy likely means your credit score is already damaged. Taking action on a plan to get out of debt is the only way to go up.
Debt Relief & Taxes
Debt management, debt consolidation and bankruptcy shouldn’t have an effect on your tax return, but debt settlement can. When a debt is settled, you may need to pay taxes on the forgiven amount. Your creditor can send you a 1099-C cancellation of debt notice, which will be reported to the IRS as other income on your tax return. To explore any possible exempt statuses you could file, consult with a tax advisor.
Debt Relief’s Effect on Actual Debt
Debt management and debt consolidation don’t change your actual debt all that much, but they could make it simpler to repay.
Debt management plans might facilitate what a DIY plan would do, which is to strategically allocate leftover money after necessary expenses to a certain balance. Popular methods are to focus on the ones with the highest interest rate (avalanche method) or the ones with the smallest overall balance (snowball method) to build momentum and chip away at the number of balances.
A debt consolidation plan aims to pay back all balances with a new loan at a lower interest rate. Doing so simplifies repayment and could save money on interest in the run.
Debt settlement carry the potential to eliminate portions of large debt in a relatively short amount of time, making it potentially cheaper than making minimum payments. Debt settlement companies like Freedom Debt Relief aim to significantly reduce your overall debt balance and resolve your debt in as little as 24-48 months. Beware of scams, though. Many lesser-known companies will try to get you to pay your fees upfront. This is illegal per the FTC.
Declaring bankruptcy is a different kind of expensive. Whether you declare chapter 7 or 13, you’re on the hook to pay for court costs, attorney fees, and oftentimes, mandated financial literacy courses. With chapter 7, you can wipe your debt away in exchange of the liquidation of some of your personal assets. With chapter 13, you’ll have to make payments for 3–5 years in order to have your debts completely forgiven, but you’ll get to keep your possessions.
If you have insurmountable debt, debt settlement and bankruptcy are two options to consider. While these strategies both leave their impact on credit scores, aren’t cheap to do, and may cost money in taxes, they’re infinitely better than doing nothing. What’s important at the end of the day is finding the right solution for your situation and starting the journey toward a debt-free life.