Credit forgiveness is when your lender eliminates all or part of your debt, arranged through a settlement, bankruptcy or a statute of limitations.
Credit forgiveness can be a lifesaver. It’s an arrangement when your lender forgives or eliminates all or part of your debt. Usually, if there is any forgiveness, it’s on a portion of your debt and not on the entire balance owed. Typically, the lender will agree to a payment that is less than the full outstanding balance and then forgive the remaining balance.
Credit forgiveness doesn’t just happen by itself. You have to take the initiative to work out the best possible scenario.
The worst thing you can do is to just ignore unpaid card debt. It’s important that your credit card issuer knows that you are willing and trying to do everything in your power to come up with a solution.
If you’re considering credit forgiveness, keep in mind most creditors will resort to forgiveness only as a last resort and only in extreme situations. They’ve usually come to the conclusion that getting some of the debt repaid is better than not getting anything at all.
Here’s three ways you can arrange for debt forgiveness.
1. Debt settlement agreement
You or a representative can contact your creditor or collections agency and explain your situation. Try to negotiate a lump-sum payment, starting with less than the maximum amount you can afford and make a deal from there.
Be sure to get a signed letter with the settlement terms from your creditor. Once the letter is in hand, pay your lump sum and confirm with the creditor that all obligations have been met.
2. Statute of limitations
The statute of limitations is the timeframe in which a creditor or collector can go to court and sue you to pay off your debt. After this time runs out, they cannot legally lay claim to the money you owe them. Some collectors might continue to pursue you, but they can’t sue you for the debt once the limitations expire.
Statutes vary from state to state, so be aware of the timeframe where you reside now. To have debt forgiven under the statute of limitations, it’s important that you don’t acknowledge the debt or make any payments because this will then restart the clock on the timeframe.
As a last resort, you can have some of your debt forgiven by filing for bankruptcy. However, this will damage your credit score and some of your assets may be sold to pay off your debt.
You’ll most likely be set up with a payment plan with a reduction in the total amount to be paid. But as in many bankruptcies, you may still owe a portion of the debt.
There are some solid advantages to credit card debt forgiveness. The biggest and most obvious is that it reduces the amount you owe, easing your financial burden and reducing the stress of collectors’ phone calls.
Another advantage is that it will improve your credit score over the long haul by arranging for payments within your reach. You can start to rebuild your credit score as long as you keep up with the payments in your debt forgiveness arrangement.
Arranging for credit forgiveness also doesn’t typically show up on your credit report. You’ll also reduce your debt, which can improve your credit utilization ratio and boost your score.
There are definitely some disadvantages of credit forgiveness, big reasons why not to go down this road.
Pursuing credit forgiveness may result in some consequences for your taxes. If your forgiven debt exceeds $600, you’ll have to report it as taxable income on Form 1099-C.
If you work with a debt settlement company, they can charge high fees, resorting to practices that are often manipulative, even predatory.
Credit forgiveness may not be the right solution for you. Assess your situation before diving in and check out the alternatives first.
Take a look at debt consolidation or a zero- or low-interest balance transfer. You’ll use a low-interest loan to pay off high-interest card debt, with a single monthly payment lower than what you’re currently paying.
A balance transfer credit card allows you to move your balance from a high-interest card to a card with a lower interest rate or no rate at all (during an initial intro or promotional period). To make the most of the low-rate period, you should pay off most if not all of the debt.
Why loans don’t always work for debt consolidation
With almost 10 years of experience in the accounting field, Caryl enjoys writing about personal finance, plays a role in helping others reach their potential.