Get Your Debt to Be Forgiven

By: Wilna Martin


The idea of debt forgiveness which many credit providers are increasingly approaching those of their debtors who owe them considerable sums of money with is likely to be a very appealing one to many of us, especially those of us who have gotten ourselves into messy debt situations, from which it is becoming evidently difficult to extricate ourselves.
The basic concept of debt forgiveness is really easy to understand, and it something that we sometimes actually do in our ordinary dealings with people who happen to owe us money. The way it works is that the creditor makes it clear to you (as the debtor) that there is the possibility of their 'forgiving' you a considerable portion of what you owe them, provided that you pay them a pre-agreed amount in lump-sum. Behind all this is of course a well thought out business strategy, because the debtor knows that by getting you to pay whatever percentage of the debt in lump-sum, they get to save on what they would have otherwise had to pay in trying to follow up on the debt, not to say anything of the fact that by getting you to pay in lump-sum, they at least get their money back, something which would not have been guaranteed were they to insist on getting full payment for the debt. Half a loaf is better than nothing, or so the ancients said. So if you owe something like say $5,000, your creditor might decide to 'forgive' you the rest of the debt, if you can pay them $4000 in lump-sum.
To get insights as to whether debt forgiveness is worthwhile to the person whose debts are forgiven, we have to examine the long term effects of debt forgiveness.
For one, tax authorities in most countries treat the amount that is forgiven off one's debts as 'income' and go ahead to tax it as such. Should this amount, when combined with real income from other sources push the debt-forgiveness beneficiary to a higher tax bracket, they could find themselves having been pushed to a point where they effectively have to pay more in taxes by a margin that is greater than what they received as a debt reprieve.
For one, when the taxman comes calling, you will be surprised to learn that they treat the amount of debt that was forgiven as an income - and actually tax it as such. It gets worse, should the forgiven debt amount actually push you to a higher tax bracket, in which case you might end up paying more in taxes than you would have received as debt forgiven, just on account of your having received it. And for the creditor to have considered you for debt forgiveness, chances are that you would have been highly delinquent in your repayments. But while they may forgive you in monetary times, chances are that they - if only out of good corporate citizenship - are likely to report the matter to the credit bureaus, leaving a blot on your credit report.
In the final analysis then, debt forgiveness has to be looked at objectively, and if one opts to enjoy the short term benefits it offers, at least do so keeping its long term effects in mind, so that they don't come to you as a surprise.

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Debt Counseling and debt management programs would help people to have lower debt. There are more info about these services at debt settlement.

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