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Can you settle a personal loan?

[Feb 25, 2011.]

 

Do you have a personal loan that you're having trouble making payments on? Whether you've experienced a loss of income, rising expenses or poor spending habits, it can be stressful to have creditors hounding you for money. If you truly can't find the money to get current on loan payments, it may be time to consider asking for a debt settlement.


What is debt settlement?


A debt settlement is an agreement you make with a creditor to reduce or cancel a debt. Let's say you owe $8,000 on a personal loan but can't keep up with monthly payments. The lender may be willing to accept a lower payoff amount. If you have some money in a savings account, you could offer a lump sum to settle the debt. In some cases, a lender may be willing to accept 30 percent to 75 percent of what you owe to pay off the loan.


Cash to pay off loan settlement


Obviously there is an incentive to settle for a lower amount. The incentive for a creditor to allow you to settle a personal loan is recovery of some of what you owe, rather than receiving nothing if you file for bankruptcy. It is unlikely you'll be able to arrange a debt settlement if you don't have cash. But even if you don't have any money it may be possible to work out a new payment plan that lowers monthly payments and/or interest.


Forgiven debt and taxes


It's important to understand the impact that settling a loan can have on your finances. Any debt that is cancelled or forgiven by creditors may be subject to income taxes because the Internal Revenue Service (IRS) often considers it income. So if the outstanding balance on your loan is $8,000, but the lender accepts a settlement of $5,000, you would have to report the $3,000 of forgiven debt as income. If you plan to settle a large amount of debt from several bills, it may be a good idea to consult with an accountant who can help determine what kind of tax bill you may be looking at.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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