Debt can be crippling. It can snowball so large that you can barely keep up with the minimum payments and barely address the principal owed. If you fall behind, you get bombarded with creditors calling you to pay up or threatening you with legal action. You can be taken to court over your debt with a judgment against you that can put a lien on what assets you do have or put a stranglehold on your income.
Fortunately, the federal government can help with debt in some ways. This article will cover four government programs to help you settle debt. Some are better options than others. But as the founder of Yield Alley, Larry Zhong, warns, “Not everyone is eligible for federal programs.”
How bad is the national debt?
Simply put, the U.S. is in debt. The national debt is more than $34 trillion, and total household debt reached $17.5 trillion, as reported in Q4 of 2023 by the Federal Reserve of New York. Additionally, delinquency rates have increased for all types of debts other than student loans. This has a significant impact on your household’s ability to stay above water financially.
How debt impacts your financial flexibility
“Managing credit is an ongoing thing,” according to Joe Camberato, CEO of National Business Capital. Too much debt can affect your debt-to-income (DTI) ratio, impacting your ability to rent an apartment, buy a house, get a credit card, or start a business. Camberato suggests, “Learn to read your DTI because the people good at managing this aspect of credit have things easier than those who don’t.”
Of course, mounting debt impacts your monthly budget. Having more debt than you can handle will affect your ability to pay off the debt as well as other household expenses and necessities. This weight can have a significant impact on your health. Those in serious debt can see a decline in mental health with issues such as prolonged stress, depression, and anxiety, as highlighted by Equifax.
4 government programs to help with debt
1. Saving on a Valuable Education (SAVE) Repayment Plan
The SAVE Repayment Plan is an income-driven repayment (IDR) plan that allows student borrowers to lower their monthly payments and get forgiveness on some of their student loans after a period of time. Because this plan is income-driven, most borrowers will pay a smaller portion of their adjusted gross income (AGI) toward their student loans. In the past, this has been at the expense of interest, which has grown the debt.
With SAVE, an interest benefit is added for those who make full monthly payments that are not enough to cover the accrued monthly interest payments, the government will cover the interest for that month. This prevents the balance from growing while you are in an IDR. As of February 2024, borrowers can see forgiveness in as little as 10 years on loans of $12,000 or less.
2. Offer in Compromise
An Offer in Compromise is an Internal Revenue Service (IRS) program that allows you to settle a tax debt for less than the total amount you owe. “If you have a debt with the IRS, it can be overwhelming,” Erica Sandberg, personal finance expert at BadCredit.org, tells Fortune Recommends. If you don’t have the money to pay the debt, the IRS can lien or levy bank accounts and personal property. “An Offer in Compromise is a legal way out of part, if not a majority of the debt,” says Sandberg.
The Offer in Compromise is based on your ability to pay, income, expenses, and asset equity. The IRS will generally accept an offer that they can “collect within a reasonable period of time.” You must qualify for an offer in compromise. Eligibility requirements include:
- You have filed all tax returns on time
- You are not in the process of a bankruptcy
- You don’t have the ability to pay
- You have a valid extension for an existing year if applying for the current year
- You are an employer and made tax deposits for the current and past two quarters before you apply
3. Chapter 7 Bankruptcy
When debts become too much to handle, a household may file a Chapter 7 bankruptcy. There are different types of bankruptcy options, with Chapter 7 being a total liquidation of assets to pay debts off with what is available. Bankruptcy courts evaluate each case where someone files for bankruptcy. When it comes to Chapter 7, the court may dismiss the case if the debts are primarily consumer-based.
Chapter 7 does not involve filing a plan to repay debts, as in a Chapter 13 filing. Instead, the bankruptcy trustee gathers the debtor’s assets, liquidates them, and pays off the debts as best as possible. The rest of the debt is settled and written off. One negative aspect of the Chapter 7 filing is that petitioners may lose their family home in the process.
Chapter 7 bankruptcy may be denied under certain circumstances, which include:
- The debtor’s income is too high
- Some of the debt can be repaid
- A previous bankruptcy discharge happened within eight years
- A prior bankruptcy case was dismissed within the previous 180 days
- There is fraud involved (committed by the debtor)
4. Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is one where a repayment plan is set in place to pay off debts and allow debtors to retain a family home. The plan looks to settle debts for a defined amount that the debtor can repay within a certain period of time. The plan will be for three years if the debtor has an income below the state median. If income is above the state median, the plan will be for five years. The courts have the option to increase the plan duration based on cause.
A key consideration in Chapter 13 bankruptcy is that debtors can prevent a foreclosure on their home. This is a key consideration for those who might otherwise choose Chapter 7 to completely liquidate all assets and write off remaining debts.
An individual is eligible for Chapter 13 if their combined total debts are less than $2,750,000 as of the filing date. They must not have filed for bankruptcy in the previous 180 days and must show up to all court dates regarding the filing. Filers must receive credit counseling on managing debts and personal finances.
The takeaway
Every household needs to address how to deal with debt in its own way. Depending on the type of debt, you may be eligible for certain government programs. Confirm with these programs whether or not you qualify and follow the guidelines set forth. If necessary, talk to a recognized debt relief company — like New Era Debt Solutions — that can help you evaluate what you owe and to whom. This may be the best way to settle debts and move on with your financial future. You can also talk to a credit repair company if your credit report shows inaccurate debts in your file.
