A debt structure is created by a contract between a lender and borrower. This contract specifies the terms of the loan, including length, payment schedule, interest rate and any collateral that may have been used. Both the lender and the borrower agree to uphold their side of the agreement, which for the borrower means making the required payments until the loan is paid off. However, borrowers with financial struggles often find they cannot uphold the original terms of the contract and may seek what is known as a renegotiation of debt.
Renegotiation Tactics
Borrowers can try to renegotiate a debt either before they have stopped making payments on that debt or afterward. Renegotiation is much easier afterward, because the lender recognizes that it will not receive profit from the borrower now that payments have ceased. However, renegotiation is also possible before borrowers stop making payments, as long as borrowers are persistent and show they do not have enough income to fulfill all their debt obligations. Getting a renegotiation before payments stop is much more beneficial for borrower credit, even if it does take extra work.
Debt Settlement
Debt settlement is one outcome of debt renegotiation, in which lenders agree to forgive all or part of the debt. Many debtors aim for this settlement, since it removes the debt burden completely, but getting a settlement can be more difficult than only changing the terms of the debt or bringing the loan up to a current status instead of late. Lenders are rarely willing to forgive the total amount of the debt and will often require a large payment in return for cancelling even part of it.
Reworking Payment Structure
Debt renegotiation can be most successful when both lenders and debtors profit. Lenders prefer arrangements where they lose little or no money in the long term, such as changes to the payment structure. A debtor can ask for a deferrment of payment, a pause in required debt payments that can last for at least several months, giving the borrower time to recover from financial difficulties. Other lenders may be willing to lower interest rates on debt to make the payments easier to handle.
Refinancing
A refinance is a new loan, typically a mortgage, that is used to replace the original loan, paying off the old debt but creating a new debt obligation. A refinance can be used to lower payments by either using a lower rate or extending the length of the loan and stretching payments out. A number of government programs exist for refinancing student loans and mortgage debts, making it easier for debtors to seek a fresh start without resorting to drastic actions like bankruptcy.
Debt Renegotiation Scams
Debt renegotiation has become increasingly popular, especially for the many homeowners facing foreclosure or bankruptcy because of late payments on their mortgages. This has lead to a rise in renegotiation scams by so-called debt resolution departments and other organizations. These are often fake offers designed primarily to collect fees from debtors and not to help with a loan. According to an article on CNN Living, these companies often charge high fees for services debtors can handle on their own. When lenders won't negotiate, CNN recommends looking for a nonprofit accredited agency.
COD Income
When a debt settlement occurs as part of a renegotiation, it creates what is known as COD, or cancellation of debt, income. While having a debt cancelled does not actually produce any money for the borrower, it does remove an obligation to pay, which, according to tax laws, has much the same effect. As a result, borrowers must pay taxes on this settlement amount. In a short sale, for instance, if the bank forgives the remainder of a mortgage after receiving money from the house sale, the debtor must pay taxes on that amount.
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