1099-C: What You Need to Know about the Cancellation of Debt Tax Form

January 6, 2021 &• 5 min read by Brooke Niemeyer Comments 4 Comments

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From early January to mid-February, you might receive a number of tax documents in the mail. They can range from expected W-2s from your employer to forms about mortgage interest you paid. One form that many people don’t expect is the 1099-C. Discover why you would receive such a form and what the IRS expects you to do with it. Make sure to consult with your tax professional for your specific situation.

What Is a 1099-C Form?

A 1099-C is a tax form required by the IRS in certain situations where your debts have been forgiven or canceled. The IRS requires a 1099-C form for certain acts of debt forgiveness because it sees that forgiven debt as a form of income.

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For example, if you borrowed $12,000 for a personal loan and only paid back $6,000, you still received the original $12,000. Not paying back the other half of the loan means you got the benefit of that money without paying for it. The IRS considers that to be income in many cases.

Why Did You Get a 1099-C Form?

Not every debt cancellation involves a 1099-C form. But if you received this form in the mail, it’s because of a debt cancellation that occurred at some point during the tax year.

Box 6 on the 1099-C form should have a code to help you determine why you received the form. You can also learn more about 1099-C cancellation of debt processes and the reasons you might receive such a form if you’re not sure whether yours is accurate.

The IRS provides instructions and information about 1099-C forms and cancellation of debt in general. That includes a list of potential codes that might be found in Box 6:

  • A—Bankruptcy (Title 11)
  • B—Other judicial debt relief
  • C—Statute of limitations or expiration of deficiency period
  • D—Foreclosure election
  • E—Debt relief from probate or similar proceeding
  • F—By agreement
  • G—Decision or policy to discontinue collection
  • H—Other actual discharge before identifiable event

What Should You Do with a 1099-C Form?

You should never ignore any tax form you receive, as each might have positive or negative implications on your tax return. But you should also not panic if you receive a 1099-C form indicating a large amount of income. It doesn’t necessarily mean that you will owe a lot more in taxes.

First, find out whether the type of debt cancellation on the 1099-C form is excluded from taxable income. The IRS provides a list of exclusions, which include debts that were forgiven because you were insolvent or involved in certain types of bankruptcies. It’s a good idea to double check with your bankruptcy lawyer about whether you need to claim 1099-C income relevant to your bankruptcy discharge.

Once you know whether you need to claim the income or not, you must incorporate the 1099-C into your federal tax filing. If the canceled debt doesn’t fall under an exclusion, you report it as “other income” on your tax return.

That income will be included with your other income in determining how much tax you must pay for the year. In short, you’ll have to pay taxes on the extra income. That might mean your refund is reduced or that you owe more taxes than you would otherwise.

In cases where the 1099-C canceled debt falls under an IRS exclusion—which means you don’t have to pay taxes on all or some of the income—you still may need to file a form. The creditor that sent you the 1099-C also sent a copy to the IRS. If you don’t acknowledge the form and income on your own tax filing, it could raise a red flag. Red flags could result in an audit or having to prove to the IRS later that you didn’t owe taxes on that money.

Luckily, the IRS provides a form for this purpose. It’s Form 982, the Reduction of Tax Attributes Due to Discharge of Indebtedness.

What to Do if You Received a 1099-C Form After Filing Your Taxes

If you don’t know a 1099-C form is coming—and many people don’t realize they might receive one—you could file your taxes before it arrives. You should file an amended return if this happens. That’s true even if the 1099-C doesn’t change your tax obligation, as you might want to get the Form 982 on record for documentation purposes. 

What’s the 1099-C Statute of Limitations?

There aren’t really statutes of limitations on cancellation of debt, though the IRS does have rules about when these forms should be filed. The creditor must file a 1099-C the year following the calendar year when a qualifying event occurs. That just means the creditor must file the next year if they discharge or forgive a debt.

If the creditor files a 1099-C with the IRS, then typically it must provide you with a copy by January 31 so you have it for tax filing purposes that year. This is similar to the rule for W-2s from employers.

However, there is no rule for how long a creditor can carry debt on its books before it decides it’s uncollectible. So, if your debt isn’t canceled via repossession, bankruptcy, or other processes, cancellation could happen at any time. The creditor doesn’t have to tell you about it other than sending the 1099-C.

Is a 1099-C Form Good or Bad for Your Credit?

The 1099-C form shouldn’t have any impact on your credit. However, the activity that led to the 1099-C probably does impact your credit. Typically, by the time a creditor forgives a debt, you’ve engaged in at least one of the following activities:

  • Failed to make payments for an extended period of time
  • Negotiated a settlement on the debt
  • Entered into a program with the creditor because you can’t pay the debt, such as a home short sale or voluntary repossession
  • Been sent to collections
  • Had a foreclosure or repossession
  • Gone through a bankruptcy

All of those are negative items that can impact your credit report and score for years. So, while getting a 1099-C itself doesn’t change your credit at all, you’ve probably already experienced a negative hit to your score.

Get Tax Help if You Receive a 1099-C

As with other tax topics, the 1099-C can be complicated. It’s a good idea to work with a professional when dealing with complicated tax matters or trying to reduce your tax burden legally.

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Charged Off as Bad Debt: An Explainer

July 21, 2020 &• 5 min read by Lacey Langford Comments 73 Comments

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Making payments late or missing payments completely spells bad news for your credit rating. When you miss too many payments, your creditor may charge off the debt. When your debt is charged off as a bad debt, don’t fool yourself into thinking it goes away.

A charged off debt can lead to harassing phone calls, garnished wages, and a major drop in your credit score. According to the Federal Reserve, consumer loans had a charge-off rate of around 2.3% in the final quarter of 2019. Credit card debt was more likely to be charged off than other forms of debt. But what is a charge-off, and how much does it impact your credit if your balance is charged off as bad debt? Find out more below, including what you can do about charge-offs on your credit report.

What Is a Charge-Off?

A charge-off occurs when you don’t pay the full minimum payment on a debt for several months and your creditor writes it off as a bad debt. Basically, it means the company has given up hope that you’ll pay back the money you borrowed and considers the debt a loss on their profit-and-loss statement. The creditor closes your account, which could be a personal loan, credit card, revolving charge account or another debt you’ve failed to pay as promised, and it’s charged off as a bad debt.

If you make payments that are less than the monthly minimum amount due, your account can still be charged off as bad debt. You must bring your account current to avoid it being charged off. Once your debt is charged off, your creditor will send a negative report to one or more of the credit reporting agencies. It may also attempt to collect on the debt through its own collection department, by sending your account to a third-party debt collector, or by selling the debt to a debt buyer.

When Will a Charge-Off Happen?

Charge-offs typically don’t happen until your payments are severely late. When you start missing payments, creditors will first send letters reminding you of your past-due bill. If that fails, they move on to the collections process. The standard time for creditors to perform a charge-off is after 120 to 180 days of nonpayment.

Does Charged Off Mean Your Debt Is Paid Off?

Charged off doesn’t mean your debt is forgiven. Don’t be misled into believing that because the creditor wrote off your balance that you no longer need to pay the debt.

Even when a company writes off your debt as a loss for its own accounting purposes, it still has the right to pursue collection. This could include suing you in court for what you owe and requesting a garnishment of your wages. Unless you settle or file for certain types of bankruptcy—or the statute of limitations in your state has been reached—you’re still responsible for paying back the debt.

How Does Charged Off Debt Affect Your Credit Score

Charge-offs affect your credit report because they’re caused by missed payments. FICO research indicates that a single late payment negatively impacts your credit score. Missing a payment by 90 days can drop your score over 100 points—but missing it by just 30 days can also have a significant negative affect on your score.

Because a charge-off results from missing payments, you have both the late payments and a charge-off listed on your credit report. Even with good credit, a single charge-off lowers your credit score substantially. Late and delinquent payments have the largest impact on your credit score because up to 35% of your score is determined by your payment history. A lower credit score can cause higher insurance rates, larger housing and utility deposits, increased interest rates and denials for new loans and credit cards.

How Long Does Charged-Off Debt Stay on Your Credit Report?

Just like late payments, a charged-off debt stays on your credit report for seven years. The seven-year clock starts on the date of the last scheduled payment you didn’t make and doesn’t restart if the debt is sold to a collection agency or debt buyer. Paying the charged-off amount won’t remove it from your credit report. The account’s status is simply changed to “charged-off paid” or “charged-off settled,” which remains on your credit report until the end of the seven-year period, when it automatically falls off your report.

How to Remove a Legitimate Charge-Off from Your Credit Report

The only way to have a legitimate charge-off removed from your credit report before the seven-year period expires is to convince the original reporting entity to do so. That’s typically the creditor that wrote the debt off.

While this tactic is hit or miss, success can mean a major positive for your credit report. And even if you’re not successful, you can still get a bit of a bump in your credit history by paying off charged-off debt. Here’s how it works.

  • You need to have enough money to negotiate with. Before you start negotiating, determine how much you can realistically pay and how soon you can pay it. If you can pay in full right away, you have more leverage to have the charge-off removed you’re your credit report, but you can also ask if they’re willing to make payment arrangements Consider saving up money or taking out a debt consolidation loan.
  • Once you have enough money to negotiate, contact the original creditor. Make sure you’re speaking to someone who has the authority to negotiate with you and make agreements about actions on your credit report.
  • Let the creditor know how much you can pay and that you’re able to make the payment today in exchange for calling the debt paid off and removing the charge-off from your credit report.
  • Get any agreement in writing from the creditor before you make a payment.

If the creditor won’t delete the charge-off from your credit report but does agree to settle your debt for less than you owe, consider the offer. Make sure they agree to mark the charge-off as paid-in-full on your credit report. That shows future creditors that you did make an effort to pay your debts and can be a critical requirement if you ever apply for a mortgage.

How to Dispute a Charge-Off on Your Credit Report

Sometimes, the charge-off on your credit report isn’t accurate. Perhaps you never owed the debt to begin with or you did pay it, and the profit-and-loss write off is a clerical error. You can work to get such items removed from your credit report by disputing them and asking the creditor to verify what they reported. Write a dispute letter yourself or work with a credit repair company to help clear up your report.

When you sign up for ExtraCredit, you get exclusive discounts to reputable credit repair services—plus access to 28 of your FICO scores from all three credit reports and additional features.

How to Avoid Balances Being Charged Off as Bad Debt

Even better than working to settle a debt and potentially get a charge-off removed is avoiding the issue in the first place. The ideal time to act is as soon as you see you’re struggling to make regular payments. Waiting until items are charged off as bad debt means your credit score will take numerous hits as you miss payments.

But if you can’t pay your debts, what choice do you have? Turns out you have many options, including some of the ones summarized below.

  • Consolidate your debt. Apply for a debt consolidation loan that lets you bring several debt items under a single account. You may be able to qualify for more favorable terms that reduce the amount you pay each month to make it easier to manage your debt. But this is more likely before your credit score drops due to missed payments and charge-offs.
  • Get a balance transfer card. If the debt you’re struggling with is credit card related, apply for a balance transfer card. If you can get approved for a card with a 0% APR offer, you may reduce how much you have to pay each month and make it easier to pay down your debts.

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  • Reach out to the creditor for help. Most creditors have programs designed to help account holders who are experiencing emergency financial situations. As soon as you know you can’t pay your bills, call the customer service line for your account and ask if there are programs you can apply for to modify your loans or seek other assistance. Just make sure the new agreement you make is possible with your budget.

Take Charge of Your Debt

The worst thing you can do is ignore debt you owe. It won’t go away, and things get progressively worse for your credit history and score when you let them fester. So, check out your free Credit Report Card today to see where your credit is falling short and start looking for ways you can realistically handle debts that you owe to improve your credit in the future.


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Best Debt Consolidation Loans of 2021

Life can feel overwhelming when you’re saddled with loads of debt from different creditors. Maybe you carry multiple credit card balances on top of having a high-interest personal loan.

Or maybe you have a loan with an adjustable-rate and your payments are starting to rise each month, making your budget more and more uncomfortable.

In these situations, it may be wise to look at a debt consolidation loan. For some people, it’s a smart choice that gets your debts organized while potentially lowering your monthly payments. Ready to learn more? Let’s get started.

Best Debt Consolidation Loan Lenders of 2021

We’ve compiled a list of the best debt consolidation loans online, along with their basic eligibility requirements. Research each one carefully to see which one can help you with your debt consolidation.

Different lenders are ideal for different borrowers. Review these options and take a look at which ones best suit your needs as well as your credit profile. Once you have your own shortlist, you can get prequalified to compare loan options and find the best offer.

DebtConsolidation.com

Since 2012, DebtConsolidation.com has worked with borrowers to find the best debt consolidation service for their unique situation. If you are not really sure where to get started with your debt repayment process, then this is a good place to start.

The company offers many resources, tools, and relief programs on how to get out of debt quickly. Wherever you are at on your debt repayment journey, they may be able to help.

After you provide some information about your debts, the website will present the best way forward. You may be matched to debt consolidation loans, debt settlement companies, or credit counseling depending on your individual situation.

You can easily compare several different options through this service which is a great way to start your debt repayment journey off right!

It is completely free to use their services. However, when you are matched to a partner, the partner may charge fees for their services. Always make sure to understand the exact terms of your debt consolidation loan before moving forward with any company.

Marcus by Goldman Sachs

If you’re looking for an online-only lender, then Marcus by Goldman Sachs may be the right choice for you. Marcus offers personal loans that can be used for debt consolidation.

If you have a credit score of 660 or higher, you may qualify for a personal loan between $3,500 and $40,000. The APR range is between 6.99% and 28.99%.

One of the best things about taking out a loan through Marcus is how transparent the bank is. There are no hidden fees and that includes late fees, which is pretty rare among other lenders.

Plus, the bank gives you the option to choose your own payment due date. After making 12 months of consecutive payments, you can defer one monthly payment if you want.

The only real downside is that you’ll need good to excellent credit to qualify. And Marcus won’t let you apply with a co-signer.

Read our full review of Marcus

Avant

Avant is designed for borrowers with average credit or better and offers a number of perks for debt consolidation.

You can get help with your debt management by getting free access to resources, plus you receive regular updates on your VantageScore to track your credit repair process.

In fact, the average borrower using the funds for debt consolidation sees a 12-point increase within the first six months. So who can get a loan through Avant?

Most borrowers have a credit score between 600 and 700. While you don’t need to meet a minimum income threshold, most customers earn between $40,000 and $100,000 each year.

One of the great things about borrowing with them is that once you are approved and agree to your loan terms, you can get funding in as little as a day. This is a great benefit if you have a number of due dates coming up and want to get started paying off your current creditors as soon as possible.

Their loan terms range anywhere between two and five years, so you can choose to either pay off your debt aggressively or take the slow and steady route.

Read our full review of Avant

Payoff

If you have fair to good credit, you may be eligible for a debt consolidation loan from Payoff. The company offers debt consolidation loans with competitive rates and flexible repayment terms. Payoff focuses on helping borrowers pay down their high-interest credit card debt.

Payoff does this by providing debt consolidation loans between $5,000 and $35,000. The APR range is between 5.99% and 24.99%, depending on your credit score. The repayment terms will be between two and five years.

One of the advantages of taking out a debt consolidation loan through Payoff is the additional support they provide. Payoff doesn’t just want to help you repay your debt; they want to help you build a solid financial future.

The lender will provide financial recommendations, tools, and resources to help you stay on track. This will help you meet your short-term goals and build positive long-term financial habits.

Read our full review of PayOff

Upstart

Upstart’s target borrower is a younger person with less established credit. So maybe you don’t have a problem with bad credit, but you have a problem with no credit. When you apply for an Upstart loan, more emphasis is placed on your academic history than your credit history.

They’ll review your college, your major, your job, and even your grades to help make you a loan offer. The minimum credit score is 620. Most borrowers are between 22 and 35 years old, but there are no technical age restrictions.

However, one requirement is that you must be a college graduate, which obviously limits the applicant pool. And while loan amounts range up to $25,000, you only have one term option: three years.

They don’t offer the most flexibility, but it does have competitive rates and a unique approval model that may help some borrowers who want a loan.

Read our full review of Upstart

PersonalLoans.com

PersonalLoans.com directly helps individuals with low credit scores so this is a great place to come if you’re still in the credit repair process.

However, there are a few restrictions: you cannot have had a late payment of more than 60 days on your credit report, a recent bankruptcy, or a recent charge-off. But if you meet these basic guidelines, PersonalLoans.com may be a good option for you.

PersonalLoans.com is unique in that it’s a loan broker, not an actual lender. Through the application, you’ll get offers from traditional installment lenders, bank lenders, and even peer-to-peer lenders.

Your actual loan agreement that you choose is signed between you and the lender, not PersonalLoans.com. This provides a convenient way to compare rates and terms through just a single application process.

Read our full review of PersonalLoans.com

LendingClub

LendingClub is a peer-to-peer lender. That means rather than having your loan funded directly by the lender, your loan application is posted for individual investors to fund.

Additionally, your interest rate and terms are determined by your credit profile. The minimum credit score is just a 600, but the average borrowers is higher.

LendingClub boasts competitive rates; in fact, its website claims that the average debt consolidation borrower lowers their interest rate by 30%. You can use the website’s personal loan calculator to determine how much you could actually save by consolidating your debt.

There’s also a large-cap on loans, all the way up to $40,000. That’s on the higher end for many online lenders, especially those open to individuals with lower credit.

Read our full review of LendingClub

Upgrade

Upgrade appeals to all different types of borrowers. When assessing a new borrower, the lender considers various factors, including their credit score, free cash flow, and debt-to-income ratio.

The company offers personal loans that can be used for many different purposes, including debt consolidation. Upgrade will even make payments directly to your lender for added convenience.

If you have a minimum credit score of 600, you may qualify for a personal loan between $1,000 and $50,000. When you apply, the lender will do a soft pull on your credit so it won’t affect your credit score.

Upgrade is one of the best options for borrowers with poor credit and borrowers with a high debt-to-income ratio. And the lender offers a hardship program, so if you fall on difficult times financially, you may receive a temporary deduction on your monthly payments.

Read our full review of Upgrade

Discover

Discover offers personal loans for borrowers with good to excellent credit. You can use a personal loan from Discover to consolidate your existing high-interest credit card debt.

If you qualify, you’ll receive a personal loan between $2,500 and $35,000. The APR range is 6.99% to 24.99%. And the bank never charges any origination fees.

You must have a minimum credit score of 660 to qualify, so Discover isn’t a good option for borrowers with bad credit. And unfortunately, Discover doesn’t give borrowers the option to apply with a co-signer.

Read our full review of Discover

OneMain

With an A+ rating from the Better Business Bureau, OneMain is a lender committed to customer satisfaction. While they offer debt consolidation loans up to $25,000, you can also get a loan for as little as $1,500.

This is one of the lowest loan minimums we’ve seen, which is perfect if you have just a small amount of debt you’d like to consolidate because of exorbitant or adjustable interest rates.

In addition to applying online, you can also elect to meet with a financial adviser at a OneMain branch location.

In fact, part of the application process entails meeting with someone either at a branch or remote location to ensure you understand all of your loan options. This is a great step that most online lenders lack, allowing you to really take the time to weigh your options and decide which is best for you.

Read our full review of OneMain

Best Debt Settlement Companies of 2021

Taking out a debt consolidation loan is just one option when you want to lower your monthly payments. Another way to go is enrolling in a debt settlement program. Rather than paying off your lender in full, a debt settlement company can help negotiate an amount to repay so that the debt is considered settled.

In the meantime, you agree to freeze your credit cards and deposit cash each month into an account that will eventually be used to pay off the settlement.

However, the downside is that to make this strategy work, you must stop making payments on your owed amounts, which will cause them to go into default. That means your credit score will take a nosedive. But, the goal is to pay less than what you owe.

If you have enough debt that it seems impossible for you to ever repay, debt settlement might be a better option than filing for bankruptcy. Below are Crediful’s top two picks for debt settlement companies. You can find the full list here.

Accredited Debt Relief

Accredited regularly works with major banks and lenders to help clients negotiate settlements. These include Bank of America, Wells Fargo, Chase, Capital One, Discover, and other financial institutions of all sizes, both large and small.

They’ll even work with retailers if you have store cards with major balances. While results vary from person to person, they offer examples of clients saving anywhere between 50% and 80% on their amounts owed.

Read our full review of Accredited Debt Relief

National Debt Relief

National Debt Relief has an A+ rating with the Better Business Bureau and prides itself on trying to help those who truly have financial hardships in their lives.

One benefit of working with this company is that your funds are held in an FDIC-insured account that is opened in your name.

That means you have full control over the account and don’t run the risk of being scammed out of your money — you can rest assured that National is a reputable company.

Plus, the team is fully versed in consumer and financial law so you can trust that your interests are being served to the fullest legal extent possible.

Read our full review of National Debt Relief

What is debt consolidation?

Debt consolidation allows you to pull all of your smaller existing debts into one new debt that you pay each month. When you take out a debt consolidation loan, you receive funds to pay off all of your existing debt, like your credit card balances and high-interest loans.

You then make a single monthly payment to your lender, rather than making multiple payments each month. Keep in mind that this is different from debt settlement in that you’re not negotiating a new amount owed. Instead, you keep the same amount of debt but pay it off in a different way.

Depending on your personal situation, debt consolidation comes with both pros and cons. It’s important to weigh both sides carefully before deciding if a debt consolidation loan is right for you.

Let’s delve into the details so that you can get closer to making a decision.

credit cards

Advantages of Debt Consolidation

There are a number of advantages associated with debt consolidation loans.

Lower Your Monthly Payments

The biggest benefit is the ability to lower your combined monthly payments. Because interest rates on credit cards are so high, it’s possible that you can find a lower interest rate on a debt consolidation loan instead, which means lower payments.

However, your actual interest rate depends on several factors, especially your credit score. It’s important to compare interest rates and the total cost of the debt consolidation loan to your current payments to make sure you don’t end up paying more over time. The goal is to save you money.

Improve Your Credit Score

Another advantage of debt consolidation is that it can actually help increase your credit score. While your amount of debt stays the same, installment loans are viewed more favorably than credit card debt.

So if the majority of your debt comes from maxed-out credit cards, you could potentially see a rise in your credit score because your credit utilization on each individual card has gone down.

A debt consolidation loan streamlines your monthly payments. Rather than being inundated with multiple due dates each month, you simply have one to remember. This also contributes to building a healthy credit score because it lowers your chance of having a late payment.

Disadvantages of Debt Consolidation

In some cases, debt consolidation loans might not be a great idea. We talked about the total cost of the loan, which needs to be reviewed holistically, not just as a monthly payment. This is true for several reasons.

Origination Fees

First, most lenders charge some sort of fee when you take out a new loan. The most common is an origination fee, typically charged as a percentage of the total loan amount.

So if you need a $10,000 loan and there is a 4% origination fee, you’ll only actually receive $9,600. Next, compare interest rates and loan terms.

Even if the monthly payments look good on paper, you may be paying a lot more over an extended payment period. You can use the APR to compare interest rates and fees, but you also need to consider how much you’ll spend on interest over the entire loan term.

Changing Your Spending Habits

Finally, it doesn’t necessarily fix the root problem of your debt.

This isn’t something you need to worry about if your debt results from a one-time incident, such as an expensive medical procedure or temporary job loss. But if you habitually spend more than you earn and are still incurring new debt, then debt consolidation loans will not help you in the long run.

If this sounds like you, try to figure out how you can curb your spending to stop accruing more debt. You can even talk to a debt counselor to help create a sound management plan for your finances.

See also: Debt Consolidation Loans for Bad Credit

Source: crediful.com

How the Debt Snowball Works

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You may have heard of Dave Ramsey’s debt snowball as a popular method for getting out of debt. We’re going to share how the debt snowball works so you can decide whether it’s a smart way for you to get your debt paid off.

The debt snowball method has a lot of great reasons for being one of the most popular methods of paying off debt quickly. But is it right for you?

Let’s find out.

In This Article

What is the Debt Snowball?

The debt snowball is debt payoff method where you list your debts from the smallest debt to the largest debt. Don’t worry about the interest rates you’re paying; just list the debts in order from smallest to largest.

Once you pay off one debt then you roll the money you were paying on that debt into the next smallest debt. Think of the proverbial snowball rolling down the hill.

This method is designed to help you pay off your debt as quickly as possible.

Your goal will be to “snowball” your payments, adding more money to each one as you tackle the debts one by one, paying off the debts and creating your debt snowball.

As your proverbial snowball rolls down the hill, the snowball gets bigger and bigger. In the same way, the debt snowball method of paying off debt calls for you to snowball your debt payments into bigger payments as you tackle each debt.

As you continue to put additional monies onto each minimum debt payment, the debts get paid off faster and faster. And you pay more extra money onto each debt as the debts get paid in full in order from smallest to largest.

The reason you pay the debts in order from smallest to largest is because it allows for some fast success in eliminating debts from your line item chart. And that will give you emotional momentum and encouragement as you see your debts disappearing.

Here’s a detailed breakdown of how the debt snowball works.

Start With Your Budget

When you make your monthly budget each month, you’ll have a list of each of your debts along with the minimum monthly payment included in that budget. Let’s use this example:

Debt Minimum                               Payment                                   Total Balance

First credit card                                      $25.00                                            $225.00
Second credit card                                 $50.00                                            $450.00
Third credit card                                   $150.00                                          $5,000.00
Car loan                                                  $450.00                                       $15,000.00
Mortgage                                              $1500.00                                      $250,000.00

So you’ve got all of these debts and payments. And you’ve got your other living expenses. Using a budget–and sticking to that budget–is a key factor in the success of the debt snowball.

We recommend using a zero-sum budget. A zero-sum budget is a budget that assigns every dollar of income you earn a designated job. In other words, there is no “extra” income left over at the end of the month.

You budget in dollar amounts for everything from monthly bills to entertainment spending, giving each category specified dollar amounts. For example, you’ll include money for hitting the clubs with friends and a designated amount of money each month that you can spend on whatever you wish.

You Have to Stick to Your Budget

The important part of success in the zero-sum budget is that you stick to the budget amounts you’ve allotted in each area. For instance, let’s say your extra spending money budget line gives you $200 a month to spend on whatever you want.

If you spend that entire $200 on a weekend shopping spree at the beginning of the month, you’ve got to refrain from spending any more extra spending during the month. Or you’ve got to find another category of spending that you can take from–groceries for instance.

But do your best to stick to the allotted amounts in your budget. Sticking to your budget is key to making the debt snowball work for you. Here’s why.

Making Your Debt Payments

Sticking to your budget is how the debt snowball works to help you pay your debts off faster. Using the budget we created above, you’ll see that you should pay off credit card #1 in roughly ten months if you’re making minimum payments only.

Once that credit card is paid off, you’ll take that $25 you were paying on that card each month and add it into your payment for credit card number two. In other words, that payment will now be $75 per month instead of $50 per month.

And after that credit card is paid off, the extra $75 from that card will go toward credit card #3 each month, making that payment $225 per month.

This “snowballing” of the payments will allow for a lot of extra money to be added toward your debt payments each and every month. After the credit cards and loan are paid off, the money that was being used for those payments will go toward the mortgage balance.

Think about it: By the time this fictitious budgeter gets their cards and car payment paid off, they’ll have an extra $675 every month to pay as an additional principal payment on their mortgage.

That equates to an extra $8,100 in payments each year. In the case of our $250,000 mortgage holder, that can cut as much as 15 years off of their mortgage payments.

Finding Extra Income for Your Debt Snowball

And here’s where the debt snowball method really gets good.

As you design your budget, you may be able to find even more income each month that you can add on to the smallest debt payment you have.

Using the extra income you have in your budget to help grow that debt snowball is what’s going to help you get out of debt even faster. Let’s say that after you add up all expenses and compare them with your income, you find you’ve got an extra $100 per month with nowhere to go.

Put that $100 as an additional payment onto your smallest debt. After that’s paid off, you’ll roll it into the next debt payment just like you do with the minimum payment for the smallest debt.

Another additional $100 on your debts will really fast track debt payoff.

Here are some ways you may be able to find some extra income each month to make your debt snowball get bigger as you pay off your debts.

Cutting Expenses

One way to find extra income for your debt snowball is to cut your expenses. Maybe you spend less money on going out each month. Or you ditch going out to eat and eat all your meals at home.

You could cut your grocery spending or drop expenses you don’t need, such as cable TV subscriptions or expensive salon trips. You could shop around for car insurance and find cheaper rates.

Or you could sell your car and buy a cheaper one you can pay for with cash. Go through each line item in your budget and see if there’s a way you could reduce it or eliminate that line item.

Then take all of the money you save each month by doing that and put it onto your debt snowball. That will make your debt snowball even bigger and help you pay your debt off even faster.

Increasing Your Income

Another way to make your debt snowball get bigger is to find ways to increase your income. You can do that in a number of ways. Here are some ideas.

Increase Your Income at Your Main Job

Can you find ways to increase your income at your main job? Can you pick up some overtime hours? Or, can you ask for a raise?

Another idea might be to go for a promotion. Is there a job opening at work that will allow for a larger salary? Check with your boss and ask if there is any way you can earn more money at work.

Get a Second Job

Getting a second job might be a good option for you to increase your income. Can you deliver pizzas? Work retail during the holidays? Clean offices at night?

Scour your local want ads or Craigslist site to see who’s hiring for a second job. This can be a permanent job or a temporary job–you decide. Just be sure you put all of the net earnings toward paying off your debt using the debt snowball.

Start a Side Hustle

A third option for increasing your income is to start a side hustle. What skills do you have that you can turn into extra cash? Can you work as a handyman? What about babysitting kids? Or caring for or walking dogs?

Maybe you can tutor kids online. Or sell your t-shirt designs on a site like Redbubble. Another idea is to work online as a virtual assistant or social media manager. You could drive for Lyft or deliver groceries for Instacart.

There are dozens of ways you can earn thousands of dollars really quickly. You just have to figure out which of your skills are best put to use given the area you live in and your available time.

Sell Your Stuff

Another way you could find extra money to put toward your debt snowball is to sell your stuff. Do you have stuff lying around in your closets and storage area that you no longer use? Consider selling it on Craigslist or a similar site and getting extra cash you can use to pay off debt.

A good rule of thumb when deciding what to sell is to ask yourself one question: Have I used this item in the past year?

If you haven’t, consider selling it (heirloom and other emotionally impactful items excluded).

Whether it’s a part-time job, your own personal side hustle business, or getting a promotion at work, any extra income you gain will allow you to speed up the debt snowball process.

How the Debt Snowball Works Better Than the Debt Avalanche

Some people recommend paying off the debts that are charging you the highest interest rate first. This method of debt payoff is sometimes called the Debt Avalanche. You may be wondering why we’re not recommending paying off the high interest debts first. After all, won’t paying off the high interest debts first save you more money in the long run?

Yes, it probably will. However, debt is a huge psychological burden for many people. Imagine you’ve got eight or nine or ten debts staring you in the face. It might feel a lot like you’re being ganged up on by neighborhood bullies.

The faster you can knock those debts out, one-by-one, the less “bullies” you’ll have pushing you around. Kicking those “bullies” to the curb will give you the confidence and strength you need to keep pushing that debt snowball forward. In other words, it will give you more momentum.

Conversely, if you tackle the highest interest debts first you may not see a debt totally paid off for many months. This can be wearying from a psychological standpoint and cause you to give up on your debt payoff goals.

Some people aren’t phased by the long list of debts in front of them. They do well with paying off the highest interest debts first. However, most prefer the psychological momentum they gain by knocking out the smaller debts super fast. Even if it does cost them a bit more money in the long run.

Only you can decide if you should choose to pay off the higher interest debts first instead of working the debt snowball method.

Should I Consolidate My Debt?

You can also make a case for consolidating your debt into one large balance and one payment. However, that method can also be wearying. This is because it will likely be quite time before that large loan is paid off. This is especially true if you’ve got a lot of debt. And if you haven’t changed your money habits, a debt consolidation loan can lead to even more debt.

But again, the choice is yours. You know yourself better than anyone, and you know how to best motivate yourself to reach lofty goals.

Summary

The debt snowball is a tried and proven method millions of people have used to get out of debt. It’s simple to use and allows for fast wins as you knock your debts out from smallest balance to largest balance.

And adding extra money to your snowball by decreasing your expenses or increasing your income will help your debt snowball get even bigger. And that means you’ll get your debt paid off even faster.

Now that you know how the debt snowball works, will you use it to pay off your debt? Or, have you used the debt snowball in the past? If so, did it work for you? What did you like about it?

What did you not like about it? Feel free to share your thoughts in the comments section.

Laurie is personal finance writer and a licensed Realtor. Her goal in blogging is to help others find their way to financial freedom, and to a simpler, more peaceful life.

Source: debtdiscipline.com

Should I Pay the Debt Collector or Original Creditor?

When a debt exists there are two parties involved – the creditor, who is the source of the loan, and the debtor, who is the receiver of the loan. If you are a debtor whose loan or credit card account goes into default, be prepared to face serious repercussions.

negotiate debt

However, it’s never too late to get your payments back on track, and it’s much easier to accomplish when you’re dealing with the original creditor. In fact, you should try to avoid having your debts sold to a collection agency at all costs.

Dealing with a collection agency can cause a ripple effect in many areas of your life, both financially and personally. Find out why it’s better to settle your debt before it’s sent to a debt collector and how to negotiate with the original creditor instead.

Why should you avoid having your debt go to collections?

It’s better to deal directly with the original creditor than to have your debt sold to a collection agency. Collection agencies are often more aggressive in their collection attempts and may take extreme measures.

The “original creditor” is the first source of the money loaned. If they can’t get you, as the debtor, to pay your debt, they often turn the effort over to a debt collection agency.

Debt Collectors

In some cases, they sell the debt to a third party – a “debt buyer.” A debt buyer is a type of debt collector who pays them a percentage of the total debt to be collected. In most cases, debt buyers pay pennies on the dollar for the debt.

At that point, the debt collector owns the debt and can then proceed to collect the full amount, plus fees, court costs, and interest. Typically, the debt collector can go to court with a lawsuit against you.

If you lose the case, you’ll receive a judgment, oftentimes for the highest amount possible. If you don’t pay the judgment right away, it could continue to accrue interest.

Eventually, you could also be subject to wage garnishment to have the judgment repaid. Plus, having either a collection or judgment (or worse, both) listed on your credit part can do lasting damage to your credit score.

Your best bet is to deal directly with the original creditor and avoid dealing with a debt collection agency altogether.

How do you know if your debt has been sent to collections?

The original creditor handles most debts until they hit about 150 days of delinquency. If you’re only two or three months behind on your payments, chances are, the creditor still holds your debt.

You should receive a letter in the mail warning you that your account is about to go into collections, so keep an eye out for any correspondence from your creditor.

Never throw any paperwork away, even if you’re dreading what may be inside. If you’re not sure if you’ve received a letter or not, call the creditor. Even if you’re at odds with them, they should be a trustworthy source of information regarding your account’s status.

Is it better to pay the debt collector or original creditor?

If the creditor indicates that your account has already been sold to a debt collector, first see if you can ask to have it pulled back from collections. If they won’t do that, it’s important to contact the debt collector and validate the debt. This ensures that they haven’t resold your account elsewhere and that you’re negotiating with the right party.

Hopefully, though, your debt still resides with the original creditor, and you can move forward with them in the settlement process. This is also why it’s important to stay on top of correspondence and not put off dealing with defaulted loans any longer than necessary.

Dealing with a Debt Collector

If you must deal with a debt collector, you should first be aware of your rights under the Fair Debt Collection Practices Act (FDCPA). Should you have any complaints about how they are handling the debt, you can contact the Consumer Financial Protection Bureau.

Also, check out our in-depth article on how to settle your debts with a debt collector.

How to Settle Your Debt with the Original Creditor

Before picking up the phone and asking to pay off your debt with a lesser amount out of good faith, have a strategic plan in place. Don’t be afraid to jot down some notes or talking points to have on hand. Ready for a strong negotiation plan? Let’s get started.

Know Your Financial Ability

If you’ve defaulted on your debt payments, chances are you’re having trouble with money. When negotiating with an original creditor, it’s important to know exactly what you can offer in advance.

For example, if the debt amount is $1,000 and you have $500 in hand with which to pay it, then it makes sense for you to make contact with that goal in mind.

It’s not a good idea to make any promises you know you can’t keep. Plus, a creditor is more likely to accept a lump sum payment over installments because it’s guaranteed cash for them. So it’s important to go into negotiations with your final number in mind and make sure it’s one you can actually hand over.

Exactly what percentage of your debt is a creditor willing to settle for? The answer really depends on each individual creditor. But one factor that is a major influencer is time. If a debt is newer, say 120 days old, the creditor will most likely want closer to the amount owed.

If a debt is older, such as 9 months old, the creditor will most likely accept a lower amount to settle the matter and get it off their books. Because of this fact, it’s helpful to do a little homework to determine what the creditor’s situation may be before attempting to settle the debt.

Handling Negotiations

Everyone knows it is best not to offer all you have to the creditor at the outset of negotiations because whatever amount is offered, there will no doubt be a counter-offer. This begins the process of negotiation. The process ends when an agreed-to amount is set.

While most creditors want a lump-sum payment over installments it is possible in some cases to establish an installment agreement. This is helpful in stopping the collection calls and keeps the creditor from initiating court action.

However, it’s also important to only agree to a payment plan that you can afford. Usually, if an installment agreement is established and you miss a payment, the full amount of the original debt (less any payments) will again become due. Remember, the creditor already has the experience of your failure to pay, and now they want to see success.

Still, it’s important to protect yourself. If the original debt was agreed to be settled for a lesser amount, be sure to get an agreement in writing from the creditor. This is usually done prior to the exchange when you actually pay the debt.

See also: The 623 Dispute Method – Disputing with the Original Creditor

Highlights

To recap, the main action items for debtors who wish to settle their debt with the original creditor are:

  • Know your scope of your financial ability to repay
  • Make contact with the original creditor
  • Have money ready to make a lump sum payment
  • Negotiate with clarity
  • Fulfill all promises to the creditor
  • Get everything in writing BEFORE sending money

How does settled debt affect your credit?

Once you’ve settled your debt with the original creditor, your credit score will likely take a hit because the debt will be listed as “settled.” It’s still better than being defaulted or charged-off, but it’s something that future lenders can see. And it could raise a red flag when considering your application for credit.

To avoid this scenario, use your credit report listing as part of the negotiation process, especially if you’re offering a large one-time payment.

As part of your agreement to pay, you can request the creditor to report the debt as “Paid As Agreed.” Even if you don’t end up successfully getting that listing, it’s worth a shot, and could even be used as further leverage during the negotiation process.

How else can you get help settling your debt?

If you’re not confident in your ability to handle the process and negotiate the debt settlement successfully on your own, you can hire an outside firm to do it for you. In general, it is best to utilize a debt settlement service with extensive experience in negotiations.

Check Out Our Top Picks:

Best Debt Settlement Companies of 2021

Credit counselors can help, as can professional settlement companies or even lawyers. The idea is to settle the debt for as little as possible so as to avoid court action and the negative effects the information will have on your credit report and credit score.

Source: crediful.com

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