Credit card debt forgiveness: Is it possible?
Credit card debt forgiveness: Is it possible?
Quick to go up, painfully difficult to bring down. Sound familiar? Most U.S. adults have credit card debt, and if you鈥檙e struggling to pay yours off or are falling behind on your payments, you鈥檙e not alone.
Key takeaways
- Credit card debt forgiveness is when your creditor agrees to accept less than the full amount you owe.
- Credit card companies and debt collectors may forgive some of your debt if you have a significant financial hardship.
- You can negotiate your debts yourself, or get help from a professional service.
You might be able to resolve your debt without having to pay the full amount you owe, says. With the right information and tools, you can regain financial health and start working toward other goals.
What is credit card debt forgiveness?
Credit card debt forgiveness means your creditor decides to permanently cancel some of your debt. This can happen when your creditor understands that you might not be able to pay them back because of .
Is credit card debt forgiveness possible?
Credit card debt forgiveness is possible. It鈥檚 usually partial, meaning your creditor agrees to accept less than the full amount that you owe. Credit card companies understand that if you are really struggling to pay your bills, it may make the most sense for them to forgive some of your debt. From their perspective, it鈥檚 better for them to receive some payment than none at all.
Even if your debt has been transferred to a collection agency, you still have a chance at with partial debt forgiveness.
When can you get your credit card debt forgiven?
Creditors are only willing to work with you when you have a significant financial hardship. That usually means you're already in default. If you鈥檙e keeping up with your payments, the creditor has little reason to believe you can鈥檛 continue to do so.
comes in many forms, such as a , a divorce, or the death of a primary breadwinner. If you have experienced a hardship that makes it difficult or impossible to repay what you owe, you can ask your creditors about debt forgiveness. They may agree to be flexible if they are convinced that you intended to pay them but genuinely can't afford to.
3 ways to get your credit card debt forgiven
Option 1: Negotiate with creditors yourself
Anyone can . The first step is to contact them and explain your situation. This will take time and perseverance, but they may agree to lower the interest rate, waive late fees, give you more time to pay, or even lower the amount you owe.
To make a decision, the credit card company will require a financial hardship form. Before you fill out and submit this form, ask yourself these questions:
- Can I explain my financial hardship?
- Can I gather the required paperwork?
- Do I have the patience to deal with numerous calls and service agents?
- Can I make a payoff offer to my creditor today?
If you answered yes to everything, you鈥檙e ready to move forward.
Option 2: Work with a professional debt resolution company
If you鈥檙e not sure how to get started or you just feel uneasy about talking to creditors, you can consider working with a reputable debt resolution service. They are experts who understand how credit card companies work and how to present your hardship and negotiate a settlement.
A reputable debt resolution company will:
- Provide you with a free debt evaluation
- Create a personalized plan for your situation
- Negotiate with your creditors on your behalf
- Settle your debts for less than you owe
is that it could lower your monthly payments, helping you make ends meet. While you鈥檙e in the program, you鈥檒l make a single monthly payment into a dedicated account. The debt resolution service will negotiate with each of your creditors to accept less than the full amount that you owe, but consider it payment in full. When a settlement offer is accepted by a creditor and you have approved the offer, it鈥檚 paid out of that dedicated account. The debt resolution company鈥檚 fee, usually a percentage of the debt you included in the program, is also paid out of that account.
All of this is handled as a part of your debt resolution program and typically takes two to four years.
Option 3: File for bankruptcy
is another option you have for resolving your debts. There are two types of bankruptcy, Chapter 7 and Chapter 13.
In a , a court-appointed trustee will sell your assets. The money they get from the sale is used to pay back your creditors. Then, any debts that remain (if they were included in your bankruptcy) are wiped out. You can keep your clothing, furniture, and retirement accounts. You can also keep some equity in your home and car. You may not keep a second home or investment property, or expensive jewelry or collectibles. Each state has its own rules about what assets are protected (these are called ) and which ones can be sold to pay off creditors.
Not everyone will qualify for Chapter 7. One of the ways the court will decide whether you qualify is by looking at your disposable income. That鈥檚 the money you have left over after you pay for your necessary expenses. Necessary expenses include things like groceries, childcare, toiletries, utilities, home maintenance, and home and car insurance. Disposable income and necessary expense rules also vary by state.
If your disposable income is greater than what the court allows, you can't have your debts wiped out in a Chapter 7 bankruptcy, and you'll be directed to Chapter 13 instead.
involves a three- to five-year monthly payment plan where you partially pay back the debt. Any balances that remain when you finish the program are forgiven. Here, the court-appointed bankruptcy trustee is responsible for collecting the monthly payments and disbursing them to your creditors. All of the creditors you include in your bankruptcy filing are required to participate, and you can keep any assets you own.
Filing for bankruptcy isn't free. You'll need to hire a qualified bankruptcy attorney to help you file the required paperwork with the appropriate court. You'll also pay court fees. Unlike debt resolution, where a fee is charged only once a debt has been settled, attorney and court filing fees for bankruptcy are paid upfront.
When is credit card debt forgiveness a good idea?
Credit card debt forgiveness might be a good idea if you鈥檙e struggling to keep up with payments, either because your debt has increased or your income has gone down. if you had every intention of paying off your debt, but financial hardship has made that difficult or impossible.
What is the downside to debt forgiveness?
Debt forgiveness could negatively affect your .
When your creditor forgives a portion of your debt, that account may be reported to the credit bureaus as 鈥渟ettled.鈥 Settled is better than delinquent, but not as favorable as 鈥減aid as agreed.鈥
Most of the people experience comes from missing payments. Many people are already behind on their bills when they decide to negotiate with their creditors, or they may choose to stop paying their bills so they can save money for settlement offers. If you already have late payments or collection accounts, debt forgiveness may not have a huge impact on your credit standing.
Your credit score is a snapshot of the information in your credit file at the moment your score is calculated. As time passes and the information changes, your score changes, too.
It鈥檚 important to look beyond temporary credit score damage. Your credit score is just one part of your financial health. Once your finances are stable, it鈥檚 easier to by paying your bills on time and keeping credit card balances low.
Another potential downside is that for some people, forgiven debt is treated as taxable income by the IRS. However, if you are insolvent, meaning you owe more than you own, you don鈥檛 have to pay income taxes on forgiven debt. The you can use to figure out whether you鈥檙e insolvent. It鈥檚 important to discuss your specific situation with a qualified tax professional.
Those aren鈥檛 the only factors, of course, but they are the biggest ones.
Comparing credit card debt forgiveness options
DIY debt negotiation
When to consider: You have the time, patience, and confidence to deal with a lot of details and a lengthy process.
What to expect: You'll spend a lot of time on the phone and may not get the results you鈥檙e hoping for.
Professional debt resolution
When to consider: You have a large amount of debt, are struggling to make minimum payments, and need help with possible solutions.
On average, people enroll about $25,000 in a debt resolution program, across eight to 10 different creditors.
What to expect: Debt experts will review your financial situation, create a personalized plan, and negotiate with creditors on your behalf to resolve your debt for less than you owe.
A debt resolution program typically takes 24-48 months. It depends on how much debt you enroll and what monthly program payment you can afford.
Fewer than 2% of debt resolution participants pay fees that are bigger than the debt amounts forgiven. A reputable debt resolution company will offer a guarantee that the total cost to settle your debts (including fees), will not exceed your enrolled debts. Very few (only 3%-5%) people who use debt resolution go through the program a second time.
Chapter 7 bankruptcy
When to consider: Your income is low enough to qualify, and you're willing to let the courts sell all of your eligible assets.
What to expect: Someone appointed by the court (a trustee) will collect and sell your assets that Chapter 7 bankruptcy doesn't allow you to keep. The trustee uses the money to pay back your creditors.
Chapter 7 bankruptcy takes an average of four months from the time you file to the time your debts are wiped clean. There鈥檚 a high success rate, so if you qualify for Chapter 7 bankruptcy, this may be your best option.
Chapter 13 bankruptcy
When to consider: You don't qualify for Chapter 7 bankruptcy, or you prefer not to have to sell your assets.
What to expect: The court will set a three- to five-year payment plan based on your financial situation. A trustee collects the monthly payments and disburses them to your creditors. You aren't forced to sell your assets.
Over half of Chapter 13 cases fail. This means that more than half of filers actually spend more on attorney and court fees than they save with debt forgiveness. In other words, the Chapter 13 program costs them more than they would have spent without it. Many people end up filing for Chapter 13 again.
If you are considering Chapter 13 bankruptcy, debt resolution may be a better option, unless you are very confident that you can successfully make it through the Chapter 13 payment plan, and your payment plan only requires you to pay a small portion of the debt you owe.
Achieve is not a credit repair organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.
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