Most consumers take out loans or incur other forms of debt with the intention of repaying the debt. However, the debt load can grow over time and become unmanageable. Creditors may be able to work with the debtor, depending on the circumstances. Often, a debtor must demonstrate some form of financial hardship to qualify for relief.
Financial Hardship
A number of things can constitute financial hardship. Often, it results from an involuntary reduction in income or an unexpected and unavoidable expense. Examples of involuntary reductions of income include losing a job, becoming seriously ill or caring for a seriously ill family member, and marital troubles, such as a divorce. Unexpected expenses include medical bills, increase in tax rates and property repairs (such as for a home or car).
Debt Forgiveness Plans
Creditors may be willing to work with you to resolve your debt troubles if you experience financial hardship. Debt forgiveness plans vary depending on the type of loan and the creditor's policies. According to Bills.com, debt relief programs may reduce, or forgive, your debts by 50 to 60 percent, as of the date of publication. In addition to your financial hardship, you may be eligible for additional loan forgiveness plans. The federal government offers incentives for volunteer work and military service, for example. Participating in these programs may result in receiving thousands of dollars that go toward reducing your loan balances.
Bankruptcy
The ultimate form of debt forgiveness is bankruptcy. Under Chapter 7 -- the liquidation proceeding -- you must either make less than the median wages for your community or have significant amounts of debt such that you cannot meet the minimum obligations. If you qualify for bankruptcy, the courts will liquidate your nonexempt assets to pay off as many creditors as possible and then discharge your obligations for most other debts, with certain exceptions.
Tax Consequences
If you qualify for debt relief and receive partial or full forgiveness on your loans, you may incur tax liability. Debts discharged during bankruptcy are not taxable income. Other debt forgiveness might be, however. For example, assume a credit card company forgives $4,000 of a $10,000 debt because of your financial hardship. Under the tax rules, the forgiven $4,000 represents income and must be reported to the IRS. This could affect your tax bracket. Prior to receiving debt relief, consider the other potential ramifications, and consult with a professional as necessary.
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