The Side Effects of Doing a Debt Relief Program

There are not as many side effects as you would think from doing a debt relief program. However, it’s important we cover all bases and go over the important ones especially if you are considering enrolling in a debt relief program.

Impact to Credit

Doing debt relief will typically have a negative impact to your credit worthiness. Unless your credit is already quite low or you are already behind on payments, there’s no real way around it. When you stop making payments on accounts that were previously current (if this is the case) your credit score tends to drop. However even though debt relief will usually have a negative impact to your credit, it shouldn’t be a long-term impact, especially if you position yourself correctly and successfully pay down your debt. If you enter a debt relief program with a lot of debt and leave it with no debt your overall credit worthiness should improve in the long term. You’ll have a better debt to income ratio and less debt weighing down your monthly cashflow.

Tax Effects of Saving Principal from Your Debt Amount

Any consumer that saves $600 or more in principal from debt forgiveness could potentially be liable to owe more in taxes. Anytime debt is forgiven in an amount of $600 or greater a consumer could potentially receive a 1099-C from the creditor that forgave the debt. It’s not guaranteed to occur but many creditors choose to send these out to customers that had debt discharged in order to recoup a tax loss. It’s always best to consult with a tax advisor if you require more information regarding this. However, to be safe you should consider setting aside some of the savings from the program, so that you can contribute towards taxes at the end of the year in which you receive the 1099-C.

Closure of Credit Cards

Credit cards you wish to enroll in a debt relief program will no longer be allowed to remain open. Since you won’t be actively paying on those accounts anymore they will have to be closed. These accounts would tend to close naturally overtime if they were to go into default as well. Since when you are not actively paying down your credit card debt accounts creditors will tend to close out those accounts after a given amount of repayment.

Other Effects

You could have some credit reporting remarks that show that the account was settled for less than the full amount. This could potentially remain on the credit report for some time but it doesn’t actually negatively affect your score. It will however show that notation and it is visible to anyone that pulls and checks your credit report. All in all debt relief is a net positive for most consumers but like with anything there can tend to be a few negative side effects.