Borrowers and taxpayers who fall behind on their payments can seek debt help from their lenders, from the IRS or from the courts. Such help can take the form of loans that are modified to reduce payments, a reduction in the debts owed, or any of a number of other forms. The most extreme version of debt help is bankruptcy, in which some or all debts can be erased or restructured by a bankruptcy court.
Loan Modification Programs
Lenders sometimes use loan modification programs to keep struggling debtors from defaulting entirely on their loans. They may, for example, agree to forego payments for a period of time to allow the debtor to recover from a temporary financial setback. They may also agree to extend the term of the loan in order to reduce the size of each payment. They may agree to accept smaller payments without adjusting the terms of the loan, or they may agree to reduce the loan’s principal balance to a level the borrower can afford.
Tax Debt Help
Taxpayers who fall behind on federal tax payments can ask the IRS to modify their payment terms, rather than demanding the money all at once. This can be done either by contacting the IRS directly, or by hiring a tax professional to act as an intermediary.
The IRS can offer any of five options to help a taxpayer get out of debt, including:
- An installment agreement: A monthly payment plan designed to retire the full debt over time.
- A partial payment installment agreement: The IRS reduces your total debt, then gives you time to pay off the balance.
- Offer in compromise: The IRS reduces the total tax debt in exchange for a lump-sum payment or a short-term installment plan.
- Not currently collectible: The IRS agrees to delay its collection efforts for a short time to give the taxpayer time to raise the money.
- Bankruptcy: A bankruptcy court can discharge some tax debts altogether under the terms of a Chapter 7 or 13 bankruptcy.
Credit Risk
Certain forms of debt help, including some types of loan modification, can adversely affect the borrower’s credit rating. Reductions in the principal balance of a loan, in particular, can hurt the borrower’s credit rating and potentially make them liable to pay income taxes on the reduced amount.
Debt Consolidation
Debtors who are falling behind can sometimes help themselves by modifying their spending behavior or by using financial tools, such as a debt consolidation loan, to reduce monthly payments.
Debt consolidations replace a collection of smaller loans with one big loan, usually from a lower-rate credit card or from a home equity loan. The goal is to reduce the required monthly payment, which can give debtors a chance to apply extra money each month toward their principal to reduce or kill their debts altogether over time.
Debt Settlement and Credit Counseling
Some struggling borrowers turn to credit counseling agencies for debt help. Credit counselors from reputable agencies try to help their clients build workable budgets. They also may attempt to negotiate with lenders on the client’s behalf to produce loan modifications on mortgages or other types of loans, to get their clients back on solid financial ground.
Debt settlement companies promise to reduce a borrower’s overall debts by negotiating with creditors, usually in exchange for upfront payments from the borrower. Some firms offer useful services, but the field has also attracted shady operators, which has caused the National Foundation for Credit Counseling to caution consumers who explore the option.
Bankruptcy
Bankruptcies allow consumers to discharge all or some of their debts through the legal action of a bankruptcy court.
Under a Chapter 11, 12 or 13 bankruptcy, the court decides how much the debtor can afford to pay, and then decides which debts will be repaid in full, which will be repaid on a reduced percentage, and which will be discharged altogether. Some debts can’t be discharged, including:
- Child support and alimony
- Payments owed for injuries or deaths caused by drunk driving
- Criminal fines and penalties
- Most tax debts
- And debts that aren’t listed on the bankruptcy filing
All others are fair game. If a repayment plan is ordered, the debtor's wages are usually garnished and the payments are made through a court-appointed trustee. Reorganization bankruptcies remain on the debtor’s credit record for six years. Under a Chapter 7 bankruptcy, most of the debtor’s personal property is turned over to the court; the court attempts to sell the property and repay the creditors. Beyond that, the debts are discharged. A Chapter 7 bankruptcy stays on the debtor’s credit report for 10 years.
Related Debt Help Resources
About.com Banking/Loans: Debt Consolidation Programs [1] About.com Banking/Loans: Four Keys to Successful Debt Help [2] About.com Banking/Loans: How Credit Scores Work [3] About.com Banking/Loans: How to View Your Annual Free Credit Report [4] About.com Banking/Loans: What is Loan Modification? [5] About.com Credit/Debt Management: Debt Management Company Watch Outs [6] About.com Credit/Debt Management: Making a Plan To Get Out of Debt [7] About.com Financial Planning: Bankruptcy [8] About.com Financial Planning: Budget Worksheets [9] About.com Financial Planning: Consumer Credit Counseling Services [10] About.com Money in Your 20s: How To Set Up a Debt Repayment Plan [11] About.com Money in Your 20s: What Can I Do To Get Out Of Debt? [12] About.com Money in Your 20s: Will Debt Consolidation Help Me Get Out of Debt? [13] About.com Tax Planning: U.S.: Getting Out of Tax Debt [14] About.com Tax Planning: U.S.: How To Find an Accountant [15] Bills.com: Debt Relief Solutions To Avoid [16] Bills.com: Free Debt Help Services [17] CBS News: Debt Settlement Can Hurt More Than Help [18] Consumer Affairs: The Trouble With Debt Counseling [19] DebtHelp.com: 45 Questions To Ask A Credit Counselor [20] Federal Trade Commission Credit Repair: How To Help Yourself [21] Federal Trade Commission: Credit Repair: How to Help Yourself [22] Fox Business: How to Spot Scam Debt-Relief Services [23] LoanModificationMortgage.Org: Loan Modification Mortgage Options [24] LowerMyBills.com: Credit Card Debt Consolidation [25] LowerMyBills.com: Debt Negotiation and Arbitration [26] Money Management International Credit Counseling Service [27] MSN Money: How Much Debt is Too Much? [28] MSN Money: The Consumer's Guide To Credit Counseling [29] National Foundation For Credit Counseling: Official Website [30] SmartMoney.com: Help! I’m Drowning in Debt [31] U.S. Department of Justice: List of Credit Counseling Agencies Approved [32]