How to Manage IRS Debts, Student Loans, and Unpaid Child Support to Improve Your Credit
IRS debts, student loans, and unpaid child support are in a special class of debts. If you’re trying to improve your credit, you need to understand that these debts aren’t dischargeable in a bankruptcy in most cases and must be paid.
An IRS debt can be one of the easiest debt situations to deal with. First, the IRS knows that you know who’s in control, so the IRS doesn’t need to intimidate you with strong-arm tactics to get your attention.
Second, the IRS isn’t chasing down its own money — it’s chasing down taxpayer money. And third, IRS employees don’t get a bonus for collecting a debt. You can probably negotiate a reasonable repayment plan with the IRS that you can manage over time.
If you have an accountant, bring him or her along when you meet with the IRS. Your accountant may be able to calmly explain why you shouldn’t owe taxes on some income or why you should get certain deductions.
IRS debts just keep growing with age. In fact, if you delay too long, the IRS pulls any tax refunds you have coming and directs the money into the treasury until the debt is paid. Just what you wanted to hear, huh?
It’s not unusual for the IRS to be very slow in notifying the credit bureaus or clearing any liens on your property records when you’ve paid your bill. Keep good records of payments and discharges, and follow up by checking your credit report and, if appropriate, the property records at your local town hall. Make sure that the records are updated.
Student loan collections used to be a joke, but no one is laughing anymore. The bankruptcy law has granted student loans nondischargeable status, and lenders pursue delinquencies forever.
Depending on how many loans are involved — you may have as many as one for each semester you were in school — the effect on your credit of being in default (check with your lender to determine when your loan enters into default) varies from bad to nuclear meltdown. Do you still owe money if you didn’t graduate or finish a semester? The answer is yes. You borrowed and spent the money.
A student loan isn’t secured with collateral in the normal sense of the word. When you leave school, whether you graduate or not, certain situations, such as economic hardship or unemployment, may enable you to defer payment for a period of time.
However, after your student loan is in default, you lose your opportunity to defer payment. Even worse, you may have to pay back the loan all at once unless you come up with an acceptable repayment scheme. You also can’t receive further student aid, your school may withhold your transcripts, your income tax refunds may be taken to offset the loan amounts, and your wages may be attached or garnished.
Following are some repayment options:
Normal repayment: You make principal and interest payments each month.
Graduated repayment: You make lower payments at the beginning, and your payments increase at specified intervals for the life of your loan.
Income-based repayment: Your monthly payments are based on a percentage of your monthly gross income (for Stafford, PLUS, and Smart loans and federally consolidated loans).
Extended repayment: Your repayment term is lengthened.
Consolidation: Your federal loans are refinanced into a single, fixed loan with a long payback period.
Serialization: You consolidate only the payments into a single payment but retain the original terms and interest rates on all your loans.
If you can’t pay back your loans as originally hoped, use all options available to you to defer your loans for as long as possible. However, after you’ve exhausted your deferments, you’ll be in default if you don’t agree to a new repayment plan
Depending on how your loans were issued, what may seem like a single loan may be as many as eight or ten individual loans (one per semester), because each loan is reported separately. So the loans may show up as eight or ten separate trade lines in your credit report.
For multiple student loans, consider the Direct Consolidation Loans program. The program provides borrowers who have at least one up-to-date federal student loan the opportunity to consolidate into a single monthly payment. You may also extend the repayment term on a student loan, which can reduce your monthly payment.
Eligible loans include the Stafford, PLUS, Perkins, Health Profession, Health Education, and Nursing student loans. You may also be able to consolidate most defaulted education loans if you can make satisfactory repayment arrangements with the current holders or agree to repay the new Direct Consolidation Loan under an Income Contingent Repayment (ICR) plan.
Delinquent student loans can be a big hiring issue. Getting a job with bad credit is a lot harder if your employer pulls a credit report to see whether you’re reliable and stable.
Unpaid child support is another category of debt that lives as long as you do. Under the bankruptcy law, child-support obligations can’t be discharged. And the courts provide custodial parents the names of collection agencies that specialize in child-support debt, so your ex can easily work with a collection agency to come after you for what you owe.
Child-support debt can result in a criminal charge and jail time if you continue not to pay it. The decision whether to seek prosecution in nonsupport cases rests with your state’s attorney general. Courts have no sense of humor when it comes to child-support debt. Plus, these debts make a very bad impression on employers. Make paying off such debt your number-one priority.