If you’re here, chances are you’ve been now labelled as “non-collectible” by the IRS. In fact, after dealing with a lot of tax stress, this status does give the relief you hoped. To be frank, non-collectible status does buy time, but it can impact your borrowing options. Well, it can range anything from mortgages to business loans.
In simple words, if you’re looking at buying a home or getting a business loan, lenders may see the non-collectible status as a red flag. To be precise, they can consider you instable, which could ultimately affect your loan approval or the interest rates offered.
But, there’s just always a silver line to everything. Simply, while the status tells the IRS you can’t pay your debt, you can turn things around any time.
If you read till the end, you will know more about how does non collectable status mean for future lending and might learn to keep your finances ready for anything.
Let’s get started.
What is Non-Collectable Status?
| Currently not-collectible status is given when a debtor faces significant financial hardship, meaning they lack the income or assets to repay tax debt. While it pauses IRS collections, interest and penalties continue to build, keeping the debt active until circumstances improve. |
What Does Non-collectible Status Mean for Your Credit and Loan Eligibility?
The status of non-collectability can have a broad impact on creditworthiness, affecting credit scores and reports.
- Increased Lender Caution: Lenders often see you as a major red flag when you have a CNC status. This, of course, makes approvals for new loans more difficult.
- Potential Credit Score Impact from Tax Liens: If the IRS files a tax lien, it can appear on your credit report, lowering your credit score and impacting your ability to qualify for loans.
- Ongoing Interest & Penalties: While IRS collections are paused under CNC status, your debt continues to grow with interest and penalties, increasing your overall financial burden.
- Higher Risk of Loan Denials: CNC status may lead to automatic denials for significant loans like mortgages or auto loans, as lenders see it as a sign of instability.
- Increased Loan Interest Rates: When approved for a loan, expect higher interest rates as lenders account for the added risk CNC status suggests.
- Lower Approved Loan Amounts: CNC status can lead to restricted loan amounts, as lenders may offer less credit to mitigate their risk.
- Reduced Access to New Credit Lines: Applications for new credit cards or higher credit limits may be denied or closely scrutinized if CNC status is present.
- Restrictions on Co-Signing Loans: With CNC status, lenders may be reluctant to allow you as a co-signer, fearing that you might not be able to support additional loan responsibilities.
- Requirement for Collateral on New Loans: Lenders may require substantial collateral when CNC status is present to reduce their financial risk on new loans.
Read More: Is IRS Currently Not Collectible Status Right for You?
Types of Loans Affected
Here’s a look at the loans most likely to be affected and what to expect.
Mortgages
Non-collectible status may raise red flags for mortgage lenders, who see it as a sign of financial distress. Approval can become challenging, and if approved, the terms may include higher interest rates or larger down payments.
Personal Loans
Personal loans are often unsecured, making lenders wary of approving them for individuals with non-collectible status. Lenders may see this status as a risk factor, resulting in higher interest rates or outright denial.
Auto Loans
Securing an auto loan may become more difficult, as non-collectible status suggests limited repayment capacity. Lenders might require a larger down payment or offer reduced loan amounts.
Credit Cards
Applying for new credit cards or requesting higher credit limits can be challenging. Lenders may be cautious, fearing that additional credit could worsen financial strain.
Business Loans
If you’re a business owner with non-collectible status, it can be more difficult to secure funding, as lenders may worry about the stability of your finances.
Home Equity Loans/Lines of Credit
Lenders may be reluctant to approve home equity loans or lines of credit, as non-collectible status raises concerns about repayment ability.
Student Loans (Private)
For private student loans, lenders might consider non-collectible status as a red flag, potentially leading to higher interest rates or stricter approval requirements.
Strategies to Improve Future Lending Chances After Non-Collectible Status
Achieving non-collectible status provides temporary relief, but improving your borrowing potential afterward requires careful planning. Here’s how to strengthen your financial profile for future lending:
- Pay Down Other Debts
Reducing outstanding debts demonstrates financial responsibility, making you a more attractive borrower to future lenders. - Avoid New Credit Applications
Hold off on applying for new credit lines until you’ve strengthened your financial profile, as multiple applications can lower your credit score. - Build an Emergency Fund
Creating a savings cushion shows lenders you’re financially prepared for unexpected expenses, signaling lower lending risk. - Increase Income Streams
Showing a stable or growing income improves lender confidence, as it demonstrates your ability to handle additional financial responsibilities. - Maintain Consistent Employment
Stable employment reassures lenders of steady income, which can improve your loan eligibility. - Pay Off Smaller Debts First
Eliminating smaller balances can improve your debt-to-income ratio, an important factor lenders consider for loan approval. - Consult a Financial Advisor
Consulting a financial advisor can provide personalized strategies to rebuild your credit and prepare for future lending opportunities.
By following these steps, you can gradually strengthen your financial profile and increase your chances of securing favorable lending options after non-collectible status.
Professional Guidance for Better Lending Opportunities After Non-Collectible Status
Professional guidance can make all the difference, helping you unlock better lending opportunities and regain control over your financial future.
Credit Protection
Advisors help prevent credit-impacting actions like IRS liens, using strategies to preserve your credit and improve future loan eligibility.
Strategic Financial Planning
Professionals create tailored plans to help you prioritize debt payments and establish savings goals, signaling financial stability to lenders.
Tax Lien Removal
If a tax lien was placed, tax experts can assist in applying for its removal through programs like the Fresh Start Initiative, boosting your credit profile.
Accurate Documentation & Communication
A professional ensures that all IRS documents are properly filed, avoiding compliance issues and maintaining a good standing for future financial endeavors.
Support for Future Compliance
Advisors set up effective tax management systems, helping you avoid returning to non-collectible status and creating a stable financial record for lenders.
Conclusion Thought
While many taxpayers view non-collectible status as a lifeline, there’s a lesser-known fact: This status is subject to regular IRS reviews. The IRS can reassess your financial situation at any time, potentially reactivating collection efforts if your income or financial circumstances improve.
Additionally, non-collectible status doesn’t prevent the IRS from offsetting future tax refunds to apply toward your outstanding debt. However, the right guidance ensures you’re not only protected now but positioned for better lending options and financial growth down the road.
