What Is Credit Card Debt Forgiveness?
Key points about: forgiving credit card debt
Credit card debt forgiveness is when some or all of a borrower’s credit card debt is considered canceled and is no longer required to be paid.
Credit card debt forgiveness is rare.
Types of credit card debt forgiveness include a restructured debt settlement plan and bankruptcy.
Financial hardship can affect anyone, and when credit card debts begin to pile up, it can seem like there’s very little you can do. But that’s not necessarily the case. Though rare, you may be able to have your credit card debt forgiven.
Can credit card debt be forgiven?
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Debt forgiveness is when either some or all of a borrower’s outstanding balance to a creditor is considered canceled, and the amount is no longer required to be paid.
Some examples of types of debt that could be forgiven include student loan debt or credit card debt. Credit card debt forgiveness is not common.
A more likely scenario than forgiving the debt is that the lender will try to collect the debt. They could use a debt collector such as a collections agency to try and collect the debt. In other circumstances, the creditor or collections agency may file a lawsuit where, if successful, a judgment could result in the borrower having their wages garnished in some states.
Before any of this happens though, you do have options to try and improve the situation. Some credit card companies, like Discover, offer hardship programs that may help you meet your financial obligations. You could also seek the assistance of a nonprofit credit counseling organization.
Debt forgiveness vs. debt relief
When researching how to get credit card debt forgiven, you may also see the phrase “debt relief.” The terms may be used interchangeably at times, as credit card debt relief is similar to debt forgiveness, but usually with a debt relief program, you have to repay the entire debt under a restructured payment plan.
Types of credit card debt forgiveness
When looking for types of credit card debt forgiveness, some widely used options are debt settlement and bankruptcy.
Debt settlement is when a lender agrees to let a borrower pay less than the amount that is owed. In these circumstances, the borrower may be able to work directly with the lender to create their own debt management plan instead of paying a for-profit debt settlement company to negotiate the settlement.
But keep in mind: While a creditor may be willing to stop collections on a portion of your debt as part of a settlement, in some circumstances, it may have to report that settled debt to the IRS as canceled debt. In those cases, canceled debt may be taxable and you would have to report it on your tax return.
There can be some risks and consequences of using a for-profit debt settlement company, and be careful to avoid debt settlement offers that “guarantee” they will be able to settle your debt, as it could be a scam.
Debt forgiveness through bankruptcy
Another type of credit card debt forgiveness can occur through bankruptcy. But this happens rarely, and declaring bankruptcy can stay on your credit report for up to 10 years, which can negatively impact your credit score and may affect your ability to get new credit during that time.
Generally speaking, when you declare bankruptcy, a court may discharge–release you from personal liability–certain types of debts while restructuring others and preserving assets.
For instance, in a chapter 7 bankruptcy, the individual may need to sell off some of their assets to pay a portion of what is owed. But in a chapter 13 bankruptcy, the debts are restructured so the individual can pay all or some of the agreed-upon balance over a three- to five-year period. Under chapter 13, the debtor is required to complete the payment plan in order to receive a discharge of the remaining debts.
In bankruptcy, secured creditors, like mortgage or auto lenders, will usually take precedence over unsecured creditors, like a credit card issuer. So, your assets will be used to pay off your secured debt first, then anything left over is used for unsecured debt. Whatever debt is left after that, may be forgiven completely depending on the terms of the bankruptcy.
There are other types of bankruptcy options, so be sure to research which option may be best for your situation. An individual can represent themselves in bankruptcy court or they can consult a bankruptcy attorney if they feel they need to pursue this option.
If you have missed a credit card payment or two, and on top of that, late fees are really starting to overwhelm you and balloon your debt, there are ways where you may be able to have your credit card debt forgiven by the credit card company. Though it is rare, and it could harm your credit score, credit card debt forgiveness may allow you to get a clean slate on your finances and begin the process of rebuilding your credit.
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