Many Americans are struggling to pay their bills. A recent study showed that 35 percent of folks in this country have past due debts that have been placed with a collection agency. Those who are drowning in a mound of debt may be humiliated and intimidated by the collection agency calls. Too many people panic and try to avoid these calls. Here are some ways to get the upper hand when dealing with these omnipresent, collection agents.
Save The Emotional Display
These calls often bring out the monster in all of us. The bottom line is they want you to pay. They will say and do almost anything to make that happen. Keep the call short and professional. Initially, these agencies are required to send you a notice to verify the debt within five days after they contact you. Don’t engage with them until you have the letter in hand.
Get Proof of The Debt
Don’t just assume that the debt is yours. These companies can make mistakes. It is estimated that more than 20 percent of these bills are erroneous. Even if it is your bill, you have 30 days after getting proof of the debt to dispute it. You can send them a letter stating that you will not pay this bill and the reasons why. Additionally, notify the three credit bureaus and let them know about the errors in your report. You have a right to get certified mail to verify the debt. While waiting for this mail to arrive, it should silence the calls.
Don’t Fall For The Scare Tactics
Most agencies will follow the laws and try to get you to pay ethically. However, there are some agencies that will use a gamut of tricks to shake you down. According to the Fair Debt Collection Practices Act, an agent is not allowed to use abusive or offensive language, and they cannot harass you by calling over and over. They may not call before 8 a.m. or after 9 p.m. If they call you at work, you can tell them to stop. They must stop calling your job if you request it. They are not allowed to claim to be an attorney or to threaten to sue or take legal action against you. Unless they intend to, they cannot threaten garnishment or say they are going to seize your property either. If the agent has violated any of these laws, you have a right to file a complaint with the FTC.
Watch The Excess Fees
Many times, these companies inflate the debts. They will add all kinds of fees onto your account. The original contract you signed had the interest charges and other fees outlined for you. Most states have laws that cap the amount of interest fees they can attach to the bill. If they are charging you way more than the initial amount of the bill, contact the Consumer Financial Protection Bureau. They can often help resolve an issue with the debt collector.
These agencies want the bill paid in full, but they will work with you as long as you are communicating with them. Most people avoid them and create a negative miscommunication. Most will accept payment plans to get the debt paid. Make sure to get any payment arrangements in writing. If they come back with a payment amount you can’t afford, don’t be afraid to push a bit and tell them what you can. If you cannot get anywhere with your agent, ask to speak to a manager.
Know the Time Limits
The biggest threat that a creditor has is taking action in court. Yes, they can take you to court, but they only have a specific window of time to do so. The window is anywhere from three to six years. You still owe them the money, but they cannot pursue the debt in court after the state of limitations runs out. Check the specific limitations for your area to make sure they are in compliance.
Dealing with a collection agency is never fun, however, most agents are cordial to those who are communicating and trying to repay the debt. Make sure they follow the state laws and don’t press their boundaries. If you feel like you are being harassed by a debt collection agency, you always have help available through the Consumer Financial Protection Bureau.
Buying a house is a dream that many Americans have, but not one that everyone can afford. When it comes to buying a home, you need to have an adequate down payment in order to make the first steps to becoming a homeowner. But between everyday expenses and budgets, finding extra money to set aside to purchase a home can be a struggle.
If you’re hoping to buy a home in the future – whether near or far – you’ll want to take a few steps to begin building up a savings account for your home purchase. Here are a few strategies you can take to saving for a home.
1. Create a Budget
If you don’t already have a budget, you’ll want to create one. Budgeting helps you see how much money you’re spending in specific areas and can prevent you from spending too much money on unnecessary items.
Creating a budget is a great way to stay on track when you’re looking to save as much money as possible. Your budget will allow you to see which areas you can cut back on spending in order to save more for a house.
2. Open a Savings Account
There is as good chance you already have a savings account opened, but opening a specific saving account for your housing funds can be a great way to get that money out of the way. When you put money into this savings account, you won’t need to worry about accidentally spending it on something else.
A specific savings account is a great way to move forward towards your house saving goals. Putting it into an account connected to your primary checking account will allow you to easily move money to your savings when you’re ready.
3. Treat it Like a Bill
When you’re trying to save money, it can be tempting to think you don’t need to put your designated amount of money away each month. If the cash is in your hand and you want to make a purchase, you may be tempted to spend the money instead of saving it.
Treating your savings like a bill means you won’t be able to go back on your saving amount. If you act like you need to pay that set amount each month, you won’t feel tempted to spend that cash elsewhere.
In order to save enough to buy a home, you need to know how much you need to save. The amount that you pay as a down payment will influence the price you can pay for a house – making the difference between buying the home of your dreams or not.
Do your research to determine how much you will need to save for a down payment to get the style, size, or location of house you’re looking for. Then work backwards to see how much money you will need to save each month to reach that goal in the timeframe you’re hoping for. Knowing what that goal ensures you stay on track.
5. Stay Flexible
While you don’t want to be too flexible with your savings plan, issues can arise. You’ll need to be flexible enough in your saving plan to recognize when that money may be better used somewhere else. If you have a major repair, medical expenses, or other high bills that could throw your saving plan off, you need to be prepared for them.
Having a solid emergency fund can help you stay on track for purchasing your home. When you have a designated emergency fund to use when unexpected expenses arise, you won’t need to dip into your home savings account.
If you’re hoping to save enough money to purchase a home, these steps can get you on track. While buying a home may not be in your immediate future, it is never too early to begin saving. Buying a home is one of the biggest purchases you will make in your lifetime, so you want to do your research to ensure you’re on the right track for saving.
Is it time to find your next ride? If so, one of the first decisions you’ll have to make is whether to lease or buy a car. Both options come with their own advantages and disadvantages, so choosing between the two comes down to which is right for your situation.
Leasing a Car
When you lease a car, you make monthly payments to use it for the length of your lease (usually two to four years). After your lease is up, you return it to the dealer, although you can choose to purchase it at that point.
With a lease, you’ll have lower monthly payments than you would if you bought a car using a loan, because you’re only paying the depreciation of the car instead of its entire value. You won’t have to worry about unexpected repairs, because when you lease a car it’s under warranty. All you have to do is keep up with standard maintenance, such as oil changes and tire rotations. If you buy a car, you’ll probably end up spending money on unexpected repairs at some point in its lifecycle.
You don’t have to figure out what to do with your car when you don’t want it anymore like you would if you purchased it. After your lease is up, you can simply lease another car, which makes this a great option if you like to drive the latest cars every couple years.
The most significant drawback to leasing is that you’re making monthly car payments without building any equity in a car. Once the lease is up, you’ll have nothing to show for all those payments you made.
Leases have mileage restrictions that limit how much you can drive the car per year. The standard amount is 12,000 miles, but some leases have restrictions of 9,000 or 15,000 miles. If you drive quite a bit, you may exceed the mileage restriction on your lease and end up with expensive overage charges. You also have to keep the car in good condition since you’ll be returning it to the dealer at the end of the lease.
Buying a Car
When you buy a car, you either pay the entire asking price up-front or pay a down payment and obtain an auto loan to cover the rest. Once you’ve paid off the loan, the car is yours.
The obvious benefit of buying a car is that you will eventually own it. You can make money off of it by selling it, and you’ll be done with car payments after you pay off the loan. You can drive your car as much as you want instead of watching your miles.
You can modify your car however you want when you buy it, and you don’t have to worry about its condition, although it is still smart to keep it in good shape to preserve its value. If you like to keep cars for a long time, you’ll be better off in the long run by buying a car.
Buying a car is more expensive than leasing a car. You’ll either end up with a higher down payment, higher monthly payments, or both. The value on the car could also drop dramatically, especially if you buy a new car, which depreciates the moment you get it off the lot.
It’s a bigger commitment to buy a car, as it will take longer to pay off and you won’t be able to get a new car every couple years like you would with leasing. As your car gets older, you’ll have to prepare for repair costs.
Leasing is becoming more and more popular among car buyers who aren’t interested in the long-term commitment that comes with buying a car. If you don’t want to be tied to the same car for longer than a couple years and you want to avoid hefty repair bills, leasing a car may be the right choice. Those who want to build equity in their car and eventually own it will find buying better fits their needs.
Whether you need funding for your business or you want to earn money back on your business expenses through reward offers, a business credit card is an excellent choice. Business credit cards come with several advantages over personal credit cards.
Card issuers realize that business owners usually spend more money per month than consumers, and they adjust the credit limits on their business credit cards accordingly. When you’re approved for a business credit card, you can anticipate a higher credit limit than you would have with a personal card.
Keep Track of Your Business Expenses
Anyone who has spent tax time going through old credit card bills trying to figure out what was a personal expense and what was business-related knows how important it is to keep expenses separate. The easiest way to do so is by having a business credit card that you only use for your business expenses. All you have to do is check your total spending on that card for the year to determine your business expenses, and you’ll have your financial records readily available in case of an audit.
Reward or Cash Back Offers
It’s a crowded credit card marketplace, which is beneficial for business owners and consumers because card issuers are constantly trying to outdo each other with their reward offers. There are two types of business credit cards: reward cards and cash back cards.
As you’d expect, cash back cards earn money back. The cash back you earn either gets taken off your bill every month, or you can request when you want it back. Keep in mind that cash back is also an option with reward cards.
Cards typically include a sign-up bonus offer that you get by hitting certain spending minimums within a designated time frame. For a cash back card, you may earn $300 cash back if you fulfill the terms of a sign-up offer. With a rewards card, you could earn 50,000 reward points or more, depending on the card.
Rewards and cash back allow you to get something back from the money you’re spending anyway. Certain cards provide extra points on specific types of purchases. For example, the Chase Ink Business Preferred credit card earns three points per dollar spent on travel. Look for a card that has special offers related to your usual spending categories to get the most points or cash back.
Improve Your Business’s Credit Score
Your business’s credit score is separate from your personal credit score, and tying a business credit card to your business is an excellent way to boost its score. Make sure that you pay your bill on time so you can maintain a high business credit score. By building your business’s credit, you’ll have better luck if you need a business loan in the future.
If you have employees that make purchases for your business, one of the most convenient options is providing them with their own card copies tied to your business credit card account. Of course, it’s important that you only provide cards to employees that you can trust. You can also set limits on those card copies to provide some protection against excessive spending.
Track Your Spending
Business credit cards typically have more advanced and detailed expense reports than personal credit cards. Using these reports, you can analyze your business’s transactions and see where your money is going every month. This makes it easier to develop a budget for your business.
The many benefits of business credit cards make them a smart choice for any business owner. Even simply putting all your expenses on your business credit card and paying the balance off every month can earn you big rewards or cash back. Look at all the available options to find one that best fits your needs, whether you’re for the best reward offers or a low interest rate.
Some people neglect to pay their debts, and others are left without a choice but to forgo making payments on specific debts in order to afford others. Whether you lost your job, your medical bills piled up to the point you can no longer afford them, or some other situation prevented you from paying you bills, you’re not alone. Many Americans fell behind on their credit card debts since the crash of the economy in 2008, and many found it impossible to make payments to their creditors. Those who haven’t made payments might find themselves in a situation in which their accounts are in collections, which has a long-lasting negative effect on their credit score.
How Debt Collections Work
When you fail to pay your bills, debt collectors come calling because your accounts are sometimes sold to their companies by credit card companies. The companies write off debts as bad debts, sell them, and take the little profit they make from the collection agency as their own. When the debt collection agency is finally in control of your account, they call. They’re required to abide by a long list of requirements, and many are strict.
Some of the requirements they must abide by include times in which they can call, the language they use over the phone, and how many times they can call. The federal government requires these laws are in place to protect consumer rights, and they don’t take it lightly when debt collectors don’t abide by the laws in place protecting consumers.
Debt Collection and Your Credit
When your debt is sold to a debt collector, you must worry about your credit. It’s going to drop substantially as a result of a collections account. The amount it hurts your credit depends heavily on the amount you owe, the score you had, and several other factors. The debt is one that remains on your account even after it’s been paid. However, there is a good chance that creditors are more willing to overlook paid accounts that remain on your credit. This could allow you to qualify for more loans and other options.
Your credit score will drop, but there’s nothing you can do about that once a debt is in collection. In fact, many consumers choose to ignore those debts as they can only remain on your credit for up to seven years from the first day of delinquency. This is true whether a debt is sold to a collection company or not. Since collectors can’t sue past four or five years in most states, the statute of limitations passes long before a debt collector begins calling.
No More Debt Collection Calls
When you find a debt in collections, it takes a notice in writing requesting they can no longer contact you at all. This is a law they must abide by if you put it in writing. This prevents debt collectors from calling you at work, at home, on your cell, or on any other past number they might have for you and your accounts. It’s not always easy to get a debt collector to stop calling by asking, and it’s not always easy to prove how often they call. Putting it in writing helps you keep your phone from ringing incessantly.
The best thing you can do with a debt in collection is pay it off as quickly as you can or find the best debt consolidation company to simplify your life. You can work out a deal with the debt collector, pay it in full right away, or spend some time waiting on it to disappear from your credit report. If you’re past the statute of limitations in your state, you might decide it’s worth your time to wait a year or two for the debt to fall right off your credit report. It’s up to you.
Debts in collections affect your score if they’re big debts, if your score is excellent, and if you have substantial debt. You have the power to get rid of the lasting negative effect by paying them off, but it’s not always possible for consumers to do that when it’s time.
So, you’ve decided it’s time to expand your business with a business loan. Applying for a business loan is a major decision, and you’ll have a better chance of being approved by the lender if you have all the right information when you apply. To get the financing you need, follow this step-by-step guide to applying for a business loan.
1. Determine the Purpose of the Loan
One of the first things a lender will ask you is what you plan to do with the loan. Maybe you want to expand your business into a new market. Maybe you just need more capital on hand for your business’s weekly expenses. Whatever your reason is, prepare a thorough answer so you can easily explain it to the lender.
2. Consider Your Lender Options
While banks are among the most common lender options for business loans, there are also microlenders that issue smaller loans and online business lenders that have higher approval rates than other options.
Banks tend to have the lowest interest rates and offer the largest loans. However, it’s much more difficult to get approved. You’ll likely have a hard time getting a loan through a bank if your business hasn’t been making a profit for at least two years.
Microlenders issue smaller loans (usually $35,000 or less) with shorter terms. Interest rates are higher than with bank loans, but you’re more likely to get approved.
Online lenders are one of the fastest options, and loans usually range anywhere from $500 to $500,000. Interest rates vary quite a bit depending on the lender, the borrower, and the loan details, but they’re almost always higher than with bank loans.
3. Make Sure That You Qualify
Every lender has its own requirements when issuing business loans. Lenders will look at your credit score, length of time in business, and revenue in deciding whether to approve your business loan application. Online lenders tend to be the most flexible, while banks are the strictest. If you need a loan but aren’t confident you’ll meet a bank’s requirements, then you may want to consider microloans or online lenders.
For your credit score, you should be above 680 if you want a bank loan, and higher is better. You’ll likely need at least one year of operation for an online loan, and two years for a bank loan. Minimum annual revenue requirements vary quite a bit depending on the lender, but typically range between $50,000 and $150,000.
4. Prepare Your Documentation
Once you know where you’ll be applying for your loan, it’s time to get all your financial documents in order so you can present them to the lender. While lenders all have their own application requirements, prepare thoroughly by gathering tax returns for yourself and your business, bank statements for yourself and your business going back at least two years, all your business’s financial statements, and any other important legal documents that are related to your business.
Having all your documents in order will make the loan application process much smoother. Keep in mind that if you’re not confident a lender will approve you, it’s smart to apply for multiple business loans within a two-week time period. Every time you apply for a business loan, the lender will make a hard inquiry on your credit when they run a credit check. Hard inquiries lower your credit score, but when multiple hard inquiries occur in the same two-week time period, then they only count as one.
5. Apply for the Loan
With everything ready, it’s time to apply for your loan. If you’re going in to a bank or microlender location, prepare to talk about your business. It may be wise to rehearse some statements regarding your business before you go. Being able to explain your business and your intention for the loan both clearly and professionally can make all the difference with a lender.
Getting approved for a business loan can be a huge step forward for your business. When you’ve prepared thoroughly and followed the right process, you significantly improve your chances of landing your loan.
On the surface, debt settlement seems like it is too good to be true. As a way to help control the debt that you owe, debt settlement allows you to pay off a lower amount than what is due. Through renegotiating your debt, you’re able to get out from underneath a crippling amount of money that you owe.
But debt settlement does have its drawbacks. Before you contact a debt settlement company to negotiate the money that you owe, it is important you understand exactly what debt settlement means and what it could mean for you.
What is Debt Settlement?
If you’re struggling to make payments on your debt, you’re probably looking for ways to lower what you owe. When you first hear of debt settlement services, you may be tempted to jump at the idea.
Under debt settlement, you would hire a company to negotiate with your lenders to reduce the amount of money that you owe. A debt settlement company will help reduce the overall debt so that you can make smaller payments each month and save money over time.
But debt settlement isn’t as great of an idea as it may sound. Using a debt settlement company can actually put you in a bad position.
Debt settlement companies want your lenders to be desperate for some kind of compensation towards the debt. This means they encourage you to stop making payments on your debt and stop responding to lenders when they attempt to collect money. They know that your lender will only agree to a smaller amount if they feel like they won’t get anything from you.
However, missing payments and ignoring your lenders can put you at risk of the debt going into collection. It can also cause points to fall from your credit score, which can be very difficult to bring back up.
If you’re considering debt settlement to mange your loans, you’ll want to know all the pros and cons.
Debt Settlement: Pros
Debt settlement can be beneficial for individuals who are desperate to lower their monthly payment. If you’re already missing payments and attempting to look for other options for controlling your debt, contacting a debt settlement company may be right for you.
Negotiating a smaller debt can save you a significant amount of money if done properly. Many individuals have ended up paying less than half of the original debt through negotiating properly. This can be life changing for many individuals.
Debt Settlement: Cons
If there weren’t cons to debt settlement, everyone would be rushing to negotiate a smaller loan. One of the biggest negatives about debt settlement is that you can really damage your credit score getting to an opportunity where negotiating is an option. If you can cover your minimum loan payment, you probably don’t need a debt settlement company.
Settling a debt also will appear on your credit report. The lender that you settle with will report that you’ve come to an agreement on a smaller amount and your credit score will be penalized for it. This mark will stay on your credit score for seven years.
A debt settlement company also does not protect you from collection agencies or late payments. While you are waiting for a negotiation to begin, your missed payments will continue to be reported and debt collectors will continue to call and contact you.
Many scams also present themselves as debt settlement companies. If you are considering working with a debt settlement company to get a smaller debt amount, you’ll want to do extensive research on the company.
Debt settlement isn’t for everyone, but it can be helpful for individuals truly struggling to make their minimum payments. If you believe that debt settlement is the best choice for you in getting out of your debt situation, then you will want to begin researching a reliable debt settlement company that you can work with.
Before you make a decision, be sure to do your research about debt settlement and what it truly means. Reading and understanding these pros and cons can be a great place to start.
Whether you’re drowning in debt or you’ve managed to get your debt under control, knowing how to properly manage the money that you owe is crucial for paying it off. Even if your debt is small, knowing what you owe and when it is due can protect you from getting further into debt.
If you’re struggling to manage your debt, here are a few steps you can take.
Know What You Owe and Who You Owe It To
To avoid falling behind on your debts, you need to outline who you owe money to, how much money you owe, and when that money is due. Depending on the number of loans or debts you have out, you may want to create a spreadsheet outlining all this information.
Check this list with the debts reported on your credit report. Be sure that they are all accounted for, that there aren’t debts that haven’t been accounted for, and the amounts that you owe are correct.
Keep this spreadsheet updated each month as you make payments on your debts.
Create a Calendar for Monthly Due Dates
Many people choose to spread out their bill due dates to help them budget during the month. If you’re unable to have all your bills due on the same day, create a calendar of when all your bills are due so that you never forget.
To ensure you don’t forget and that your payment is made on time, you may even want to write the due date down a day or two earlier. This gives you the opportunity to schedule your payment so that it is received on time, avoiding any late fees or extra payments.
You may even want to use an app or digital calendar that can send you notifications that your due date is approaching.
Build a Monthly Budget
Budgets are a great way to account for everything you need to pay during the month. If you’re saving for a purchase or tight on cash, a budget can prevent you from overspending in areas you don’t need to overspend in.
To ensure you’re on top of your bills and that you have the money to meet payments in full, factor them into your budget. If you’re unsure what your bill may be each month, use the upper limit as your budget restriction. This will give you a bit of wiggle room for savings or spending money if your bills end up being less.
Apps and worksheets are a great way to start building a budget that works for you.
Prioritize Your Debts
While you should pay off all of your debts sometime, you may want to focus on paying certain debts more heavily than others. If you have debts in collections, those should be paid off before you focus on paying off any other debts.
Other approaches to paying off debts include paying off the debt with the highest interest rate first. This can save you money in the long run. Another approach to paying off your debt is to pay off the smallest debt first. This can encourage you to keep going because you will see results more quickly.
Use your list of debts to prioritize the debts you would like to pay off first.
Pay the Minimum Payment
While you should always try to pay a bit more than the minimum payments, paying at least the minimum payment can help you stay on top of your debts. The minimum amount will not influence your credit score negatively and will prevent you from growing your debt through late fees.
Keep in mind that the minimum payment does not prevent interest from accruing. When you are able to pay more than the minimum payment, you can reduce the amount of money you will spend on the debt overall.
Check what the minimum payment is for your debt bill early on. This will give you time to prepare for the payment so you can pay it on time.
No matter how much money you owe in debt, you want to be able to pay it off appropriately. This tips can help do that.
What Are Structured Settlement Annuities (SSAS)?
An Annuity is an agreement between a client and an insurance company which allows the repayment of a premium to be done over a period. The Annuity agreement has both the characteristics of both insurance and an investment policy. Structured settlements have a link to annuities since many consider them as effective ways of delivering funds the people who need it. For more details, you can check on the website https://www.debt.org/advice/annuities/ to find more on structured settlement annuities.
A structured settlement Annuity is usually used in resolving the personal injury incidents. The Structured Settlement Annuity which pays in a predefined frequency is utilized in the personal injury cases. Currently, the SSAs are receiving support from various quarters in the Country. Those that have affirmed their support include the American Association of people with Disability, trial bar, National Consumer League amongst others. You can visit the website https://www.law360.com/articles/763833/pros-and-cons-of-structured-settlement-annuities to view some factors to consider in settling for Annuities.
Let us have a look at some of the merits and demerits of Structured Settlement Annuities that you need to consider as you embrace its use.
Advantages of the Structured Se Annuities settlement
1.Provides a plaintiff with a credible and substantive tax benefit
When a plaintiff opts for the out of court settlement agreement, he or she is likely to a significant tax benefit because personal injury settlements in the United States are considered as “tax-free.” The United States Tax Code, therefore, exempts the plaintiff from incurring a tax burden. This is not an assured however since there are some exceptions where some portions of the settlement are legally taxable. For instance, interest may accrue from the settlement and will need to be taxed. This is why you need to discuss well with your tax attorney, Certified public accountant or Personal Injury attorney. You can go to http://injury.findlaw.com/accident-injury-law/structured-settlements-pro-s-and-cons.html to get finer details.
2. Annuities are protected by State Insurance Laws
The obligations of an insurer are always covered in States that have annuities protected under the State Insurance Laws. Some States in the Country have a safety forum for any insurance companies that go bankrupt hence shield them from a possible shutdown. The Insurance companies and policy claims remain operational.
3. The certainty of payments to plaintiffs over a fixed time frame.
Plaintiffs who opt to receive the Structured Settlement Annuity are assured of receiving their payments within a specific period. The other good thing is that, in other cases, lump some payments may be offered in cases that involve minors, which in turn gives space for long-term investments. Injuries that will require future medical expenses will be catered for by this long-term investments.
4. Agreements for parties who are geographically apart
A Structured Settlement gives a conducive forum for people who are far from each other to arrive at an agreement. People who are apart can be negotiated for and find an agreement that is both acceptable to the plaintiff and the defendant.
Disadvantages of Structured Settlement Annuities
1.hidden charges or tax
Certain parts of the Structured Settlement Agreement are taxable. These include punitive damages, fees charged by the attorneys, and others can impact negatively on the money the plaintiff receives, whether in lump-sum or a fixed, regular payment.
2. Reluctance from Insurance Companies to disclose the amount they will give
In the recent past, insurance companies were very reluctant to tell clients how much money they pay to purchase an annuity that covers the amount of the settlement. Lack of this information renders the plaintiff’s attorney clueless since he cannot be able to make a complete assessment. However, currently, some states have come up with a disclosure law that is shielding clients.
3. Low Confidence from plaintiffs on negative economic conditions
Clients will at some point grow cold towards economic conditions like inflation that may occur anytime. Sudden changes like recession will drastically reduce the annuity payments.
2017 Might Be an Unforgiving Year
The Burst Bubble
It’s been about ten years since the real estate bubble burst. Many Americans were left owing more on their mortgages than their homes were worth. As many as could do so negotiated mortgage modification plans with their lenders. The result of the modifications, or refinancing, resulted in lower amounts needed to pay off mortgages.
Those homeowners who couldn’t come to an agreement with their lenders suffered through foreclosures or short sales. Unfortunately for them, the value of their homes remained less than the amounts they owed, so they had mortgage payments due unless their lenders were then willing to make modifications.
Modifications meant that people didn’t have to pay back the full amount they had originally borrowed. The lenders “forgave” substantial amounts of what was due. That is debt forgiveness.
The Silver Cloud Had a Dark Lining
Mortgage debt forgiveness allowed people to keep their homes. That was good. However, at the end of the year, they received tax forms telling them that the amount of forgiven debt was taxable income. That was not good.
When money is borrowed, it isn’t taxable income because you agree to pay it back. When you don’t pay it back, it then becomes taxable.
Congress to The Rescue
In 2007, Congress enacted the Mortgage Forgiveness Debt Relief Act. The Act exempted forgiven mortgage debt from taxation. There were some caveats of course. The mortgage had to be for your principal residence. The debt reduction had to be related to a loss in value of your home or changes in your finances.
Forgiven mortgage debt on second homes or rentals was still taxable. If the debt was reduced because you performed work or services for the lender, you lost the exemption. If you had taken out a second on your home and used that money for something else, any debt reduction was taxable income.
The Act has been extended several times. The current extension expired on December 31, 2016. If you began negotiations before then and have a written contract, you may still qualify for the exemption even if the actual forgiveness doesn’t take place until 2017.
The Crystal Ball Is Cloudy
It is unknown at the present time if there will be another extension enacted before the end of 2017. It is also unknown that if such extension would be made retroactive to January 1, 2017.
It’s probably a good idea to contact your representatives in Congress and petition them to extend the Mortgage Forgiveness Debt Relief Act. If you think you’re going to have debt forgiven in 2017, ask Congress to extend the Act retroactive to January 1, 2017.
Neither mortgage lenders nor the IRS is going to forgive debt or taxes just because you say you can’t pay what’s due. There are lots of forms to fill out and hoops to jump through. If you don’t have an attorney or accountant, your first step is to hire one.
Any amount of debt reduction or forgiveness that is not taxed will be subtracted from the tax basis of your home if you sell it. This could have worse financial consequences than paying the taxes at the time your mortgage is reduced. Expert counseling is advisable.
Forms and More Forms
For now, if you had mortgage debt forgiven in 2016, you will receive a Form 1099-C from your lender. It will show the potentially taxable amount. If you disagree with the numbers, you have to contact the lender to resolve any discrepancies.
If you believe you are exempt from taxation, then Form 982 must be attached to your income tax return. Ignoring Form 1099-C is definitely not in your best interests.
Keep in mind also that this is only a Federal exemption. Your state might still consider debt reduction as taxable income.