Debt can be reduced at the debt collectors discretion. This is usually done if the person owing the debt is experiencing some sort of financial hardship. These arrangements arent mandatory, but when they occur, debt reductions due to financial hardship require verification and are accompanied by a payment agreement.
Hardship Definition
Hardship is anything that causes a borrower to become unable to pay for basic needs of food, shelter and clothing. It is caused by job loss, death of a primary earner, disability or catastrophic event.
Debt Settlement
Reduction of private debt is more like debt settlement, which is a negotiated and reduced debt amount agreed upon by both the borrower and the debt collector. Some debt settlements are granted without consideration for hardship.
Offer in Compromise
The IRS also allows debt reduction for hardships in the form of offer in compromise. There are several requirements for the program, but essentially the taxpayer must pay at least 20 percent of the original tax bill and must prove hardship, or that he cannot pay the full amount.
Disaster Relief
The IRS has several tax credits, deductions and exemptions for those who have hardship due to a natural disaster. Some banks also have disaster relief programs to help mortgage holders and other borrowers in this situation.
Mortgage Modification
As a result of the 2009 Making Home Affordable Program, the U.S. government has created the opportunity for borrowers to modify their mortgage loans through reduction in interest and in some cases the principal owed.
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