Having debt can feel overwhelming. If it seems like you won’t be able to continue to make your debt payments, then you may want to consider pursuing debt forgiveness options.
If someone borrows money under a legal agreement to repay the money they borrowed, whether it be a fixed or determinable amount, then they have debt. Debt forgiveness is when debt is canceled and the amount that was still owed is no longer required to be paid.
What debt forgiveness is
Debt forgiveness happens when a lender forgives either all or some of a borrower’s outstanding balance on their loan or credit account. For a creditor to erase a portion of the debt or the entirety of debt owed, typically the borrower must qualify for a special program.
While this sounds like an ideal debt solution, debt forgiveness is not a get-out-of-jail-free card. Let’s take a closer look at how debt forgiveness works across various debt types and the pros and cons of this process.
Types of debt forgiveness
How debt forgiveness works can vary depending on what type of debt you’re looking to get forgiven. Here are a few of the more common forms of debt that may qualify for debt forgiveness, as well as some debts that typically don’t.
Student loan debt
Generally, when someone references student loan relief, they are referring to a conglomerate of student loan debt forgiveness programs designed to eliminate part or all of a borrower’s student loan debt. Typically, each program has its own unique requirements and approval standards and there are programs designed to fill specific niches. For example, some professions like nursing and teaching have more options for student loan forgiveness.
Bankrate insight
As of early 2023, the administration’s forgiveness plan is being considered by the Supreme Court, and the federal student loan pause has been extended either until June 30, 2023 or 60 days after litigation is resolved.
Once federal student loan debt is forgiven (private student loan debt forgiveness programs can be difficult to find), the borrower won’t be required to make student loan payments in the future. Eliminating debt may sound like a guaranteed win, but there are pros and cons to student loan debt forgiveness:
Pros
- Several federal programs are available.
- You can save money on student loan payments.
- Certain professions have a leg up and may qualify for a specialized program.
- Even if you can’t get all of your debt wiped away, you can likely get some of it forgiven.
Cons
- Private student loans generally aren’t eligible for forgiveness.
- Forgiveness generally doesn’t happen overnight.
- Eligibility requirements are strict.
- If you have already defaulted, you won’t qualify for forgiveness.
Medical debt
Medical bills can mount quickly and many people struggle to pay them. Because so many people face medical debt-related challenges, there are processes in place for getting help with this type of debt in the form of medical bill debt forgiveness programs.
You can call the medical facility where you incurred your debt and ask to learn more about qualifying for the hospital’s financial assistance policy. Some hospitals may call this charity care and these programs typically look at income when deciding who qualifies.
In some cases, the hospital may lower your bill significantly or forgive it completely. Nonprofit hospitals are actually legally required to have assistance policies.
In 2022, the three major credit bureaus announced that paid medical collections are set to disappear from Equifax, Experian and TransUnion credit reports. Additionally, unpaid medical collections no longer appear on credit reports unless they’ve been in collections for at least a year, and medical debts under $500 no longer appear on credit reports.
Pros
- Even if you don’t qualify for complete forgiveness, financial assistance may be available.
- There is no set limit for how much you need to earn and often, medical debt forgiveness is awarded on a sliding scale.
- If you don’t qualify for forgiveness at all, there are other ways to potentially get your bill reduced.
Cons
- It can take a bit of work to get medical debt forgiven and there’s no guarantee that you’ll get the desired end result.
- You may need to provide the medical institution with documentation like tax returns and pay stubs to prove the need.
Mortgage debt
Unfortunately, mortgage debt forgiveness is pretty hard to come across these days. This is partly because the housing crisis led to lenders having to forgive too much housing debt, and they don’t want to end up in a similar situation again. But mortgage forgiveness isn’t impossible.
Because mortgage loans are secured with collateral in the form of your home, it’s more likely that you will be able to receive a mortgage modification from the lender. A mortgage modification occurs when your lender agrees to alter your original loan so that it is more manageable under your current financial situation.
Pros
- While full forgiveness might not be an option, mortgage modification can make your monthly payments much more manageable.
- A mortgage modification can even lower the amount of principal that you owe.
- Plenty of conventional lenders offer modification and this can be available for FHA-issued mortgages as well.
Cons
- Complete mortgage forgiveness is rare and hard to qualify for.
Credit card debt
Credit cards are another example of a type of debt that generally doesn’t have forgiveness options. Credit card debt forgiveness is unlikely as credit card issuers tend to expect you to repay the money you borrow, and if you don’t repay that money, your debt can end up in collections.
Debt settlement is the closest alternative to forgiveness for credit card debt. Credit card debt settlement is a process in which you agree with your lender to pay less than what you currently owe them.
Pros
- Debt settlement can lower your monthly payments and make debt easier to pay down.
- You may be able to agree to pay your debt off with a lump sum that is less than what you owe.
Cons
- Debt settlement companies are often predatory and your credit score can end up damaged due to their actions. Not to mention, they can charge hefty fees.
- Working with a lender directly to settle your debt is a better alternative. But by the time a lender is likely to consider this option, the odds are your payments will be overdue and your credit score will already have taken a hit.
Tax debt
If you don’t have enough money to pay your taxes, you may find you have tax debt and can qualify for an IRS debt forgiveness program. The IRS has a few options to help make repaying that debt more manageable. One of these options, known as “offer in compromise” (OIC), occurs when you owe more than you can afford to pay.
To qualify for OIC, you’ll need to prove that paying that bill will be detrimental to your finances and, if approved, you may be allowed to settle your debt for less than you owe. This is usually only an option if you’ve exhausted all other payment choices.
The IRS takes your income, expenses, asset equity and ability to pay into consideration. If the IRS believes you can actually pay off your debt, whether in full or in installments, then you won’t qualify for an OIC.
Pros
- An OIC allows you to settle your debt for less than you owe, saving you stress and money.
- If you don’t qualify for OIC, the IRS offers installment agreements that allow you to make small, manageable payments until your debt is paid off.
Cons
- Tax debt relief scams abound. Anyone who guarantees reduced or eliminated IRS debt, especially without actually reviewing your financial situation, is likely running a scam. It’s always best to work directly with the IRS.
Benefits of debt forgiveness
While the main benefit of debt forgiveness is pretty straightforward — you have less debt to pay — there are a few other benefits worth considering.
Your credit score isn’t impacted
Not being able to pay off your debt can lead to credit score damage due to late or missed payments. When your debt is forgiven, your credit score is generally not affected. Having less debt can also improve your credit utilization which helps boost your credit score.
Lenders won’t come after you
Once your debt is forgiven, you aren’t responsible for the amount forgiven, whether it was for the full amount of debt or just part of it. This means you won’t have to worry about a lender coming after you to collect the debt down the line.
Downsides of debt forgiveness
Debt forgiveness isn’t a perfect process, and the major downside associated with debt forgiveness may outweigh the perks. It will be up to you to decide if it’s worth it or not.
Taxes
Debt forgiveness does not magically wipe away all financial responsibility. Once a debt is forgiven, the forgiven amount is treated as taxable income. The IRS takes most forms of forgiven debt under consideration.
If your forgiven debt amounts to more than $600 and is determined to be taxable, then your lender is required to issue you a 1099-C form that includes the canceled amount you should report. And a lot of forgiven debt can result in a very large tax bill.
If your forgiven debt amounts to less than $600, then you may not receive a 1099-C. Even without this form, you’ll have to report it on your next tax return.
Shady debt settlement agencies
There are a lot of shady agencies ready to prey on people in crisis. Some debt settlement agencies charge money to handle tasks you could have done on your own, such as contacting a credit card issuer’s hardship department. Others are outright scams that take your money without working toward reducing your debt.
Do your due diligence before signing up with any debt settlement, credit card consolidation or credit repair program: Consult the Better Business Bureau, look for user reviews, and avoid any program that charges fees upfront.
Alternatives for managing debt
If you decide that debt forgiveness is not the best path for you or find it isn’t an option that you qualify for, you may want to begin considering alternative ways to manage your debt.
Debt consolidation
Debt consolidation occurs when someone merges multiple sources of debt into a single debt. The upside of doing this is that you can manage just one payment instead of paying multiple lenders each month.
Ideally, when you consolidate your debt, you’ll be able to get your hands on a lower interest rate that will save you money and make the debt easier and faster to pay off.
With debt consolidation, you’ll still need to pay off your debts, but in some cases, this strategy can simplify the process and lower payments.
Balance transfer credit card
If you are on a stable path to paying off your credit card debt, a balance transfer credit card can be a great strategy for paying down debt. A balance transfer card allows you to transfer multiple sources of credit card debt onto one credit card.
Ideally, you’ll take multiple sources of high-interest credit card debt and transfer them to a single credit card with a lower interest rate. Some balance transfer credit cards have 0 percent intro APR offers that can make paying down debt even less expensive.
Debt settlement
If you’re struggling to pay off your debt, you may want to call your creditors and negotiate a settlement of your debts. Typically, a debt settlement allows you to pay off much less than you owe.
It’s worth noting that the Federal Trade Commission has raised some concerns about debt settlement companies, as they may instruct you to stop making payments on your debt during the negotiation process, which can hurt your credit score.
Debt management plan
A debt management plan is a program that provides participants with a structured repayment plan that will help them pay off their debts under the direction and guidance of a credit counselor.
Generally, the debts under a plan like this qualify for waived fees and reduced interest rates. This means that a debt management plan may have similar benefits as consolidation but can be easier to qualify for if you have a lower credit score.
The bottom line
At the end of the day, debt forgiveness can provide some major financial relief for those struggling with debt, but it can also lead to pricey tax bills. You’ll want to carefully consider all of your debt management options to make sure debt forgiveness is the right option for your financial situation.
If you decide to pursue debt forgiveness options, communicating on your own behalf directly with lenders is often the best path forward. Understanding the timeline to forgiveness, possible pitfalls and potential tax implications on the front end of forgiveness are key to maximizing the benefit of pursuing such relief.
FAQs
While debt forgiveness may sound like a magical solution to all your financial woes, it can come with downsides, such as having to pay taxes on the amount of debt forgiven or taking a hefty hit to your credit score.
What is the downside of debt forgiveness? ›
While debt forgiveness may sound like a magical solution to all your financial woes, it can come with downsides, such as having to pay taxes on the amount of debt forgiven or taking a hefty hit to your credit score.
Is debt forgiveness a real thing? ›
Debt forgiveness happens when a lender forgives either all or some of a borrower's outstanding balance on their loan or credit account. For a creditor to erase a portion of the debt or the entirety of debt owed, typically the borrower must qualify for a special program.
What happens to a debt when its forgiven? ›
If your debt is forgiven or discharged for less than the full amount you owe, the debt is considered canceled in the amount that you don't have to pay. The law provides several exceptions, however, in which the amount you don't have to pay isn't canceled debt. These exceptions will be discussed later.
Do credit card companies ever forgive debts? ›
Most credit card companies are unlikely to forgive all your credit card debt. But they occasionally accept a smaller amount to settle the balance due and forgive the rest. Or the credit card company might write off your debt. But this step doesn't eliminate the debt—it's often sold to a collector.
Who loses money on loan forgiveness? ›
Low- and middle-income individuals
According to an analysis by the White House, 87% of the dollars forgiven under its plan would go to those making less than $75,000 a year. Meanwhile, any individuals earning more than $125,000 would be excluded from the relief all together.
Is cancellation of debt good or bad? ›
Unless debt cancellation comes in the form of bankruptcy or debt settlement, cancellation of debt doesn't always impact your credit score. However, debt cancellation may not be all good news for you. In some cases, you may have to pay taxes on canceled debt, as the government may consider it taxable income.
Does the IRS ever forgive tax debt? ›
Yes, after 10 years, the IRS forgives tax debt.
After this time period, the tax debt is considered "uncollectible". However, it is important to note that there are certain circ*mstances, such as bankruptcy or certain collection activities, which may extend the statute of limitations.
Why is it so hard to pay off credit card? ›
Paying off debt requires constant sacrifice. It's hard to do since we're continually flooded with advertisem*nts for goods and services we don't need. As long as you're paying off debt, you have to say “no” to things—vacation, electronics, and jewelry—that will hinder your debt repayment progress.
Is loan forgiveness effective? ›
A recent CNBC survey found that more than half of respondents would pay off other loans if student loans were canceled, and 45 percent would save for retirement. In the end, student loan cancellation will make it easier for households to manage their budgets and save for their future.
At the end of every seven years you shall grant a release of debts. And this is the form of the release: Every creditor who has lent anything to his neighbor shall release it; he shall not require it of his neighbor or his brother, because it is called the Lord's release.
Does the Bible say all debt should be forgiven? ›
Bible Gateway Deuteronomy 15 :: NIV. At the end of every seven years you must cancel debts. This is how it is to be done: Every creditor shall cancel the loan he has made to his fellow Israelite.
Is it biblical to pay off debt? ›
The Bible makes it clear that people are generally expected to pay their debts. Leviticus 25:39. No one will or should advance any argument against this general proposition.
Can I ask a creditor to forgive my debt? ›
Make a call: Depending on who owns the debt (e.g., the original creditor or a collection agency), you can reach out to see if debt forgiveness is an option. If you have the capability, it might be a good idea to record the call. Just be sure to disclose that you're doing so.
Are credit cards a debt trap? ›
Defining a Debt Trap
Without an established emergency fund, credit cards and payday loans are two of the most costly options for dealing with these unexpected expenses. It may be difficult to make payments toward your debt and you may incur late payment fees and high interest, further compounding your debt.
Does it look bad to settle a credit card debt? ›
Can debt settlement hurt your credit? Because creditors report debt settlement to the credit bureaus, it can indeed have a negative impact on your credit score and can stay on your credit report for years to come.
How many people actually get loan forgiveness? ›
The U.S. Department of Education has “fully approved” more than 16 million people for federal student loan forgiveness and sent their applications to loan servicers, the Biden administration announced Friday.
Can all my loans be forgiven? ›
The answer: Yes! However, there are very specific eligibility requirements you must meet to qualify for loan forgiveness or receive help with repayment. Loan forgiveness means you don't have to pay back some or all of your loan.
Who benefited from loan forgiveness? ›
The plan would forgive up to $10,000 in federal student debt for individuals making less than $125,000 a year and married couples making less than $250,000 a year. Additionally, the student loans of income-eligible individuals who received Pell grants would be reduced by up to $20,000.
What debt should you avoid? ›
Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time. Credit cards are convenient and can be helpful as long as you pay them off every month and aren't accruing interest.
Cancellation of debt income isn't subject to taxation if it's excluded from your gross income. Any debt that's discharged in a Title 11 bankruptcy isn't included in your gross income. That exclusion applies to debt canceled during insolvency, too.
What is the difference between debt forgiveness and debt relief? ›
Debt forgiveness is different from debt relief, which refers to a debt payment program that helps lessen the financial burden of debt by making payments more manageable. However, debt relief does not erase or forgive debt. When considering debt forgiveness, it's important to carefully weigh the pros and cons.
What is the IRS 10 year rule? ›
All distributions must be made by the end of the 10th year after death, except for distributions made to certain eligible designated beneficiaries. See 10-year rule, later, for more information.
Can IRS collect taxes after 7 years? ›
Internal Revenue Code section 6502 provides that the length of the period for collection after assessment of a tax liability is 10 years. The collection statute expiration ends the government's right to pursue collection of a liability. The period for collection expires 90 days after the date specified in the waiver.
Can the IRS audit you after 7 years? ›
How far back can the IRS go to audit my return? Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. We usually don't go back more than the last six years.
How can I pay off $50000 in debt in one year? ›
What it takes to pay off $50,000 in debt in one year in 5 steps
- The benefits of paying off all your debt in a year. ...
- Tips to pay off $50,000 of debt in a year. ...
- Create a budget and track all expenses. ...
- Be mindful of debt fatigue. ...
- Prioritize paying high-interest debt first. ...
- Get a higher-paying new job. ...
- Freelance on the side.
If your total balance is more than 30% of the total credit limit, you may be in too much debt. Some experts consider it best to keep credit utilization between 1% and 10%, while anything between 11% and 30% is typically considered good.
How to get out of 30K credit card debt? ›
4 ways to pay off $30K in credit card debt
- Focus on one debt at a time.
- Consolidate your debts.
- Use a balance transfer credit card.
- Make a budget to prevent future overspending.
Student Loan Forgiveness is Unlikely to Impact Inflation Rates | Bankrate.
Will cancelling student debt cause inflation? ›
There could also be some stimulating impact, as the debt cancellation could free up borrowers' cash flow, and the additional spending may create more tax revenue. However, at the same time, this is also likely to be inflationary.
The Biden administration says these borrowers will receive double the amount of forgiveness because “Pell Grant recipients typically experience more challenges repaying their debt than other borrowers.”
Does unpaid debt go away after 7 years? ›
A debt doesn't generally expire or disappear until its paid, but in many states, there may be a time limit on how long creditors or debt collectors can use legal action to collect a debt.
Is it a sin to go into debt? ›
Though the Bible does not encourage financial debt, there is one debt it does encourage, and that is to love one another. Romans 13:8 “Owe no one anything, except to love each other, for the one who loves another has fulfilled the law.” The Bible does not forbid debt, but it does not speak positively of it.
What does the Bible say about people owing me money? ›
“The wicked borrow and do not repay, but the righteous give generously.” - Psalm 37:21. As Christians, we know that paying our debts is important. We serve a just and righteous God who hates dishonesty, but what if someone owes you money? What recourse do you have?
What does Jesus say about repaying debt? ›
Matthew 6:12 - Forgive us our debts, as we forgive our debtors. Matthew 18:27, 30, 32, 34 - Forgive because your debts have been forgiven. Luke 7:42-43 - He who is forgiven much (debt) loves much; he who is forgiven little (debt) loves little.
Can God pay my debts? ›
All of us have a spiritual debt we cannot pay, but the Bible tells us God has paid our debt! He canceled the payment due for our sins and instead accepted the payment His Son Jesus provided when He died on the cross (Colossians 2:14). God grants this freedom to all who choose to follow Jesus (Colossians 2:13).
Should I forgive someone that owes me money? ›
If someone you care about owes you money, the most loving thing you can do for them is to let it go. You loaned money to a close friend or family member, and they're having some trouble paying it back. What should you do? God wants you to let it go.
Should you pay tithe if you are in debt? ›
Even if you're in debt or walking through a rough financial season, tithing should still be a priority. Yep—you read that right. While it's tempting to throw that money at your debt, the discipline and faith that tithing brings are so worth it.
Where in the Bible does it say to stay out of debt? ›
Romans 13:8 AMPC
Keep out of debt and owe no man anything, except to love one another; for he who loves his neighbor [who practices loving others] has fulfilled the Law [relating to one's fellowmen, meeting all its requirements].
What does Proverbs say about debt? ›
Proverbs 22:26-27
26 Do not be one who shakes hands in pledge or puts up security for debts; 27 if you lack the means to pay, your very bed will be snatched from under you.
Filing for Chapter 7 bankruptcy eliminates credit card debt, medical bills and unsecured loans; however, there are some debts that cannot be discharged. Those debts include child support, spousal support obligations, student loans, judgments for damages resulting from drunk driving accidents, and most unpaid taxes.
Can a personal loan be forgiven? ›
Debt forgiveness is usually available for unsecured debts like credit cards, personal loans, or student loans. Secured debts like a mortgage or a car loan are not usually eligible for debt forgiveness. If you default on a secured debt, the lender will likely pursue foreclosure or repossession.
When someone forgives a debt? ›
If your debt is forgiven or discharged for less than the full amount you owe, the debt is considered canceled in the amount that you don't have to pay. The law provides several exceptions, however, in which the amount you don't have to pay isn't canceled debt. These exceptions will be discussed later.
How much debt does the average American have? ›
Average American household debt statistics
The average American holds a debt balance of $96,371, according to 2021 Experian data, the latest data available.
How much credit card debt does the average American household have? ›
The average U.S. household has $6,473 in credit card debt
According to data from Experian, the average American's credit card balance in the third quarter of 2021 was $5,221. The Ascent examined research on American credit card debt and found that Americans had $841 billion in credit card debt in 2022.
Why do people have so much credit card debt? ›
People are paying more for food, housing and gas. Generally, it's the practical stuff that gets people into credit card debt," said Ted Rossman, credit expert at CreditCards.com. "It's all contributing to increased balances."
Is it better to pay off bad debt or settle it? ›
It's better to pay off a debt in full (if you can) than settle. Summary: Ultimately, it's better to pay off a debt in full than settle. This will look better on your credit report and help you avoid a lawsuit. If you can't afford to pay off your debt fully, debt settlement is still a good option.
Does freedom debt relief ruin your credit? ›
It helps debtors manage their debt burden and negotiates with creditors on their behalf. Will likely hurt your credit score: Like with any debt settlement company, working with Freedom Debt Relief will typically make your credit score drop at first. Depending on your situation, it could be a significant tumble.
What percentage should I offer to settle debt? ›
Start by offering cents on every dollar you owe, say around 20 to 25 cents, then 50 cents on every dollar, then 75. The debt collector may still demand to collect the full amount that you owe, but in some cases they may also be willing to take a slightly lower amount that you propose.
What are the risks of a debt relief program? ›
Using debt settlement options to reduce debt comes with several risks, including late payments on your credit report, potential charge-offs, settlement company fees, tax implications on forgiven balances, possible scams and the overall risk of settlement offers not working.
If the debt forgiveness program is permitted to move forward, at a time when consumer spending already is high, it could lead to more inflation, Jones said. “We certainly don't have a consumer spending problem right now,” he said. “Just last month, we saw some of the highest consumer spending numbers in two years.
Why is debt relief bad? ›
Debt settlement will negatively affect your credit score for up to seven years. That's because, to pressure your creditors to accept a settlement offer, you must stop paying your bills for a number of months.
Does national debt relief ruin your credit? ›
National Debt Relief doesn't “ruin” your credit, but the debt settlement process could cause you to take a credit hit. Part of any debt settlement program often involves ceasing payments to creditors.
Is it better to settle a debt or pay in full? ›
It's better to pay off a debt in full (if you can) than settle. Summary: Ultimately, it's better to pay off a debt in full than settle. This will look better on your credit report and help you avoid a lawsuit. If you can't afford to pay off your debt fully, debt settlement is still a good option.
Can debt relief take your house? ›
Your home provides security to the lender that you would pay back the debt. If you owe money for most other debts like credit cards and medical bills, you (usually) did not sign a security agreement. So, the creditors cannot seize your home to pay the debt.
How long does debt relief stay on your credit report? ›
How long does debt settlement stay on your credit report? Debt settlement will remain on your credit report for seven years. This means that for those seven years, your settled accounts will affect your creditworthiness. Lenders usually look at your recent payment history.
Is loan forgiveness bad for inflation? ›
Student Loan Forgiveness is Unlikely to Impact Inflation Rates | Bankrate.
Is student loan forgiveness causing inflation? ›
Similarly, Mark Zandi, Moody's Analytics chief economist, says the effect on inflation is “largely a wash.” He estimates that student debt forgiveness starting at $10,000 will increase inflation by 0.08%, as measured by the consumer price index (CPI), another commonly used measure of inflation.
Will loan forgiveness increase taxes? ›
As part of your income, your federal student loan forgiveness balance may increase your tax bill, but may not be enough to push you into a higher tax rate. For instance, if you added $10,000 of forgiven loans to the above $40,000 income, it would still be taxed at a maximum of 7%.
Why are people mad about student debt relief? ›
Much of the criticism about the student loan debt relief decision suggests that the government is giving irresponsible borrowers a “hand-out.” Other criticisms claim that the decision is unfair to those who paid off their student loan debt and causes an undue burden to taxpayers.
Yes, National Debt Relief is a legitimate company accredited by the Better Business Bureau and currently holds an A+ rating. It also has IAPDA (International Association of Professional Debt Arbitrators) accreditations for all of its arbitrators and an AFCC (American Fair Credit Council) membership.
How much do debt relief companies charge? ›
Debt settlement companies charge a fee, generally 15-25% of the debt the company is settling. The American Fair Credit Council found that consumers enrolled in debt settlement ended up paying about 50% of what they initially owed on their debt, but they also paid fees that cut into their savings.
Will debt settlement affect my mortgage? ›
First, debt settlement will not directly affect your ability to buy a home. However, if you want a home loan, you need to know that your settlement will be visible on your credit report for seven years.
