Debt can be devastating. The amount can snowball to the point where you can barely keep up with the minimum repayments and barely cover the principal amount owed. If you are late, your creditor may demand payment or threaten you with legal action. You could be sued over the debt, resulting in a lien on assets you own or a judgment that puts a dent in your income.
Fortunately, the federal government can assist with debt in several ways. This article describes four government programs that can help you resolve debt. Some options are better than others. But Yield Alley founder Larry Zong cautions that “not everyone is eligible for federal programs.”
How serious is the country's debt?
Simply put, the United States is in debt. According to the New York Federal Reserve's fourth quarter 2023 report, the national debt exceeded $34 trillion, and total household debt reached $17.5 trillion. Additionally, delinquency rates for all types of debt other than student loans are rising. This has a significant impact on whether a household can stay above water financially.
How debt affects financial flexibility
“Credit management is an ongoing thing,” said Joe Canberato, CEO of National Business Capital. Too much debt can affect your debt-to-income (DTI) ratio, which can affect your ability to rent an apartment, buy a home, get a credit card, or start a business. Camberato suggests, “Learn to read your DTI, because those who are good at managing this aspect of credit will have it easier than those who aren't.”
Of course, increasing debt will affect your monthly budget. Having more debt than you can handle will affect not only your ability to repay your debts, but also other household expenses and necessities. This weight can have a serious impact on your health. As Equifax highlights, people with severe debt can have poor mental health due to issues such as long-term stress, depression, and anxiety.
4 government programs to help with debt
1. Savings Based on Valuable Education (SAVE) Repayment Plan
The SAVE repayment plan is an income-driven repayment (IDR) plan that allows student loan borrowers to reduce their monthly payments and have a portion of their student loans forgiven after a certain period of time. This plan is income-driven, so most borrowers end up paying a smaller portion of their adjusted gross income (AGI) towards their student loans. In the past, interest was charged and the debt increased.
SAVE adds an interest benefit to those who pay the full amount each month that is not enough to cover the monthly unpaid interest, and the government pays the interest for that month. This will prevent your balance from increasing while you are in the IDR. As of February 2024, a borrower can receive forgiveness in as little as 10 years for her loans of $12,000 or less.
2. Offer of compromise
An offer in compromise is an Internal Revenue Service (IRS) program that allows you to settle your tax debt for less than the total amount owed. “If you owe money to the IRS, you could be in trouble,” Erika Sandberg, a personal finance expert at BadCredit.org, told Fortune Recommends. If you don't have the money to pay your debt, the IRS can seize or seize your bank accounts and personal property. “An offer in compromise is a way to legally forgive some, if not most, of your debt,” Sandberg says.
Compromises are determined based on your ability to pay, income, expenses, and asset capital. The IRS typically accepts offers that can be “collected within a reasonable time.” You need to compromise and qualify for the offer. Eligibility requirements include:
- Filed all tax returns on time
- you are not in bankruptcy proceedings
- you don't have the ability to pay
- If you apply in the current year, you can have a valid extension for the existing year
- You are an employer and have paid your current and past two quarters' taxes prior to filing.
3. Chapter 7 Bankruptcy
If the debt is too much to handle, the household may file for Chapter 7 bankruptcy. There are different types of bankruptcy options, and Chapter 7 is a complete liquidation of your assets to pay off your debts with what is available. Bankruptcy courts evaluate each case in which someone files for bankruptcy. When it comes to Chapter 7, if the debt is primarily consumer-based, the court may dismiss the case.
Unlike a Chapter 13 filing, a Chapter 7 does not involve filing a debt repayment plan. Instead, the bankruptcy trustee collects and liquidates the debtor's assets and repays the debt to the extent possible. Any remaining debts will be cleared and canceled. One of the downsides to filing for Chapter 7 is that applicants may lose their family home in the process.
Chapter 7 bankruptcy may be denied under certain circumstances, including:
- Debtor's income is too high
- Part of the debt can be repaid
- Last bankruptcy discharge occurred within 8 years
- A previous bankruptcy case was dismissed within the past 180 days
- Contains fraud (crime committed by the debtor)
4. Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is one in which a repayment plan is established to pay off debts and allow the debtor to keep the family home. This plan aims to settle the debt for a set amount that the debtor can repay within a certain period of time. If the debtor's income is below the state median, the plan is for three years. If your income is above the state median, your plan will be for five years. The court has the option to extend the planning period based on cause.
An important consideration in Chapter 13 bankruptcy is whether a debtor can prevent a foreclosure on their home. This is an important consideration for those who may choose Chapter 7 to fully liquidate all assets and cancel remaining debts.
An individual is eligible for Chapter 13 if their total debt is less than $2,750,000 as of the filing date. You must not have filed for bankruptcy within the past 180 days and must attend all court dates related to the filing. Filers should receive credit counseling regarding debt and personal financial management.
Take out
Each family needs to work on how to deal with debt in their own way. Depending on the type of debt you have, you may be eligible for certain government programs. Check your eligibility with these programs and follow the guidelines set forth. If necessary, consult with a well-known debt relief company, such as New Era Debt Solutions, to assess who owes what. This may be the best way to resolve your debt and move forward with your financial future. You may also want to contact a credit repair company if your credit report shows inaccurate debts.
