It is many a debtor's dream to just wake up one day and be told that their debts have been forgiven, and they don't have to worry about them anymore. And while this ideal - where every debt someone has gets forgiven - is hardly ever played out in the real world, it turns out that many creditors today are actually increasingly offering an arrangement called 'debt forgiveness' through which debtors can have at least a part of their debts forgiven.
The way the debt forgiveness itself works is such that the creditor agrees to effectively 'discount' their debtor on the amount they need to pay, provided that the debtor can pay the amount remaining after the 'discount' in lump-sum (that is, in a huge one-off payment). It is the amount of the debt that the debtor decides to let go of if the debtor agrees to pay in lump-sum that is referred to as a 'forgiven debt' in this context. From a business point of view, the creditor is giving the debtor the opportunity to benefit from the money that they (the credit) would have had to spend in trying to follow them around for the debt; while also 'rewarding' them for at least paying the portion of the debt they manage to pay in lump-sum - keeping in mind that the whole debt is very possibly an amount they would otherwise have had to write off in its entirety.
But like all coins, the debt 'forgiveness' coin has two sides to it - the good side and the bad side; especially when we take a long term perspective. In the short, there is no argument about the fact that you can save yourself considerable sums of money through debt forgiveness, like in the above case where you get to save a whopping $1,000 on account of having to pay $4,000 in lump-sum. But what about the long term?
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.
And secondly, while the creditors might 'forgive' the monetary debt, chances are that they would have to report the delinquency that made the forgiveness necessary, a fact that ends up lowering one's credit score to an extent that they have to pay more (in interest) on their future borrowings than they received as a debt reprieve.
So at the end of it all, as you go about agreeing to a debt forgiveness arrangement, remember that there is often an unseen side to it: that the debt amount that you are forgiven ends up being lower than quoted when it is subsequently taxed as an income, and that pushing your creditors to a point where they are willing to accept to measures like debt forgiveness is not likely to do your credit record any good.
The way the debt forgiveness itself works is such that the creditor agrees to effectively 'discount' their debtor on the amount they need to pay, provided that the debtor can pay the amount remaining after the 'discount' in lump-sum (that is, in a huge one-off payment). It is the amount of the debt that the debtor decides to let go of if the debtor agrees to pay in lump-sum that is referred to as a 'forgiven debt' in this context. From a business point of view, the creditor is giving the debtor the opportunity to benefit from the money that they (the credit) would have had to spend in trying to follow them around for the debt; while also 'rewarding' them for at least paying the portion of the debt they manage to pay in lump-sum - keeping in mind that the whole debt is very possibly an amount they would otherwise have had to write off in its entirety.
But like all coins, the debt 'forgiveness' coin has two sides to it - the good side and the bad side; especially when we take a long term perspective. In the short, there is no argument about the fact that you can save yourself considerable sums of money through debt forgiveness, like in the above case where you get to save a whopping $1,000 on account of having to pay $4,000 in lump-sum. But what about the long term?
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.
And secondly, while the creditors might 'forgive' the monetary debt, chances are that they would have to report the delinquency that made the forgiveness necessary, a fact that ends up lowering one's credit score to an extent that they have to pay more (in interest) on their future borrowings than they received as a debt reprieve.
So at the end of it all, as you go about agreeing to a debt forgiveness arrangement, remember that there is often an unseen side to it: that the debt amount that you are forgiven ends up being lower than quoted when it is subsequently taxed as an income, and that pushing your creditors to a point where they are willing to accept to measures like debt forgiveness is not likely to do your credit record any good.
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