Will A Debt Management Program Ruin My Credit?

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As Debtonator glanced at this month’s list of questions, he is reminded that there is always (at least) two sides to every story.

Readers lament their situations with housing, student loans and credit cards, which coincidentally happen to be the three largest sources of debt in the country.

On the other side, the government has nothing to say about those three key issues, but does chirp proudly about the budget deficit not being as deep a hole this year as it could have been.

The Congressional Budget Office projects that the deficit will increase by $506 billion this year. Last year’s deficit was $680 billion. That makes five years in a row that the size of the deficit has shrunk, or in non-government language, not grown as much as it did the year before.

Even better news is that the CBO estimates that the government will spend $95 billion less on Medicare in 2019 than it projected when Obamacare was passed in 2010. The bulk of that savings comes from doctors ordering less hospital stays and more generic medicines for Medicare patients.

Nonetheless, leave it to the government to pat itself on the back for grossly miscalculating spending on everything and ignoring the three areas that concern its citizens the most.

Now on to our questions.

Q. Can I still get a tax break if I do a principal reduction or short sale?
A. Nope. The bill that allowed for that expired this year and though Congress considered extending it and everyone seemed in favor of it, they never voted on it. From 2007 to 2013, Mortgage Forgiveness Debt Relief Act didn’t count whatever amount of your mortgage that was forgiven as being taxable. Now it does. If you get a $50,000 principal reduction or the bank forgives $50,000 of the balance due after a short sale, the IRS considers that income. You will receive a 1099 form from the lender and must account for it at tax time.

Q. Which is better: Getting a principal reduction on my mortgage or doing a short sale?
A. Depends on whether you want to stay in the house or get rid of it. Both of these are ways to deal with homes that are underwater, meaning worth considerably less than what is owed on the house. With principal reduction, you can remain in the home and, as long as you stay current with payments, the bank will forgive an agreed upon amount of the mortgage after five years. With a short sale, the lender allows you to sell the house for less than what is owed. All the money goes to the bank. The bank can either forgive the difference owed, or hold you responsible for all or part of it. Laws on that vary from state to state.

Q. My son just graduated and started a teaching job that qualifies him for public service loan forgiveness as long as he makes his payments for 10 years. What happens if five years from now, he quits teaching, works in my husband’s business for 3-4 years, then returns to teaching? As long as he kept up with payments, does he still get his loan forgiven after 10 years?

A. Short answer: No! The loan will not be forgiven until he makes 10 years (i.e. 120) of “qualified” payments. To be a “qualified” payment, he must be working full-time at a qualified public service organization. I would guess your husband’s business does not fit that definition. If your son goes back to teaching or finds another qualified public service job, his “qualified” payments will resume where he left off. When he gets to 120 “qualified” payments, the balance of the loan (if there is one at that point), will be forgiven.

Q. I took out some PLUS Loans to pay for my daughter’s college education. We’ve hit a tough stretch financially and I’m wondering if there is any chance I can get these loans forgiven?

A. There is, but not under any circumstances you would like. PLUS loans can be forgiven if you or your daughter dies or if you become permanently disabled.

Q. I’ve got some severe credit card debt and was thinking about going into a debt management program, but a friend says that is going to ruin my credit score. I probably already destroyed it, but is he right: Can being in a debt management program ruin my credit score?

A. Credit reporting agencies don’t dock your credit score for enrolling in a debt management program, but what you do while in the program can impact your score. For example, if you make continuous, on-time monthly payments, that’s a positive and so is the fact you’re paying down the debt. On the other hand, debt management programs typically require you to stop using credit cards, which can have a negative impact. Overall, however, I’d say all parties feel better when you take steps to pay your debt and DMPs are a good start for doing that.



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