Sunday, October 19, 2003

Reasons for Requesting Debt Forgiveness

Debt forgiveness is when you convince a creditor to take less money than you owe them as full payment for the loan. Exactly how much will vary from situation to situation. Common options include a percentage of the balance, all the money you've paid so far and even no money at all. When considering whether or not to ask for debt forgiveness, consider the following pros.

Help Your Bottom Line

    The math on debt forgiveness is basic. If you owe a total of $50,000 to various creditors and get one to forgive a $7,000 debt, then your total debt is only $43,000. This makes a palpable difference in your financial bottom line.

Creditors are More Open Than You Might Think

    Remember that creditors have to go through a long, expensive process to force you to pay off a debt. Legal fees, collections fees and the wages of their employees all add up to a sizable expense. Forgiving a thousand dollars of your debt might save the company two thousand of expenses if it looks like you're unable to pay.

    Individual companies are more or less willing to forgive debt. As a rule, credit card companies aren't willing to negotiate over your basic bills, but will often forgive late fees and even some of the interest. Small businesses are often more willing to forgive debt, while your federal student loan will only be forgiven if you die with a balance still due.

Helps Your Credit Score

    If you can negotiate forgiveness before a company sends you to collections, you can avoid adverse reports appearing on your credit record. Even better, the reduced debt helps your debt-to-income ratio, which many banks use to decide whether or not to give you a loan and at what interest.

Allows You to Service Other Debt

    If you get one debt removed from your load, you can use that money to pay off other loans. If you're paying $1,500 a month on three loans and get a $300 per month loan forgiven, you can use that $300 to pay off one of the other two loans that much faster. The end result is freedom from debt months or even years earlier than you had expected.


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