If the time comes that a borrower is not able to keep up with his payday installment loan payments, will it be possible that he can ask his lenders to forgive his debts? This is a critical question for those borrowers who are struggling with their debts.
For most lenders, getting something is better than getting nothing at all. This means that lenders prefer to work with you to find a new payment plan rather than charge you with late penalty fees with no assurance that you will be able to pay for them. There are lenders who may settle your account for a percentage of what you owe. This is commonly referred to as debt forgiveness.
When lenders forgive debts, they agree to write off all or a portion (usually 50% to 80% of the original balance) of the outstanding debt. Lenders agree to forgive debts to minimize the amount of loss incurred by a lender due to defaults. In addition, there are certain advantages for the lender when they forgive debts. One is saving time and resources that are used collecting outstanding accounts. Another important advantage is that lenders can claim a tax deduction on all or parts of the total forgiven debt which will help minimize the overall loss due to payment defaults.
For the consumer, forgiving a portion of a payday installment loan debt creates a great relief. Unfortunately, debt forgiveness may not be that good for him after all. There are some downsides when consumers of payday installment loan ask the lender to forgive his debts.
First, a negative will be reflected on your credit score. Basically, your credit report contains a list of all of your outstanding debts and your repayment history. If a lender agrees to forgive a part of your debt, they report it to the credit bureaus. This report will be reflected on your credit report and stays there for 7 years. This is a negative on your credit score resulting in losing points depending on your personal financial circumstances. Fortunately, this impact will subside as years pass.
Another disadvantage of getting debt forgiveness is that you will have to pay tax on the amount of the forgiven debt. The Internal Revenue Service, IRS, considers any forgiven debt as income. When a lender forgives debts, the amount forgiven will be reflected as additional income on the part of the consumer and he is required to pay an income tax for the amount forgiven. If the consumer does not to pay the tax amount it is then considered a tax debt. Usually, the government doesn’t forgive debts in taxes. It is important, therefore, that when you consider asking your lenders to forgive your debts remember to include the calculation for tax liabilities.
Debt forgiveness maybe a good option for borrowers who are struggling with their payday installment loan debts. However, the process requires lengthy negotiations with the lender and there are taxes to pay. Even if lenders forgive debts, it still advisable that consumers be responsible payers.