How Credit Card Debt Forgiveness Works: Tips & Stats
Credit card debt forgiveness is when a credit card company does not make you repay all of your outstanding balance. It’s possible under certain conditions, but you always have to give something up to get it. The idea behind credit card debt forgiveness is that if creditors can’t get the full amount owed in a reasonable timeframe, they may decide that something is better than nothing and forgive the rest. But debt collectors will only resort to forgiveness in extreme situations, usually after several missed minimum payments. So it’s more about your creditor making the best of an unprofitable situation.
Approaches to Credit Card Debt Forgiveness:
- Reach a debt settlement agreement: You negotiate with your credit card company to decide on an amount you’re able to repay – paid either immediately as a lump sum, or over an agreed upon period of time – and the remaining debt is forgiven.
- Wait out the statute of limitations on credit card debt: You can beat a lawsuit for the debt and avoid paying if the SOL has expired. Statutes of limitations for debt vary depending on what state you’re in.
- Consolidate your debt: This won’t necessarily forgive your debt, but it can stop unnecessary interest from accruing while you pay off your credit card debts. Though it’s not forgiveness, it’s forgiving. You could do this with a balance transfer credit card, personal loan, or home equity loan.
- Consider declaring bankruptcy: Some or all of your credit card debt might be discharged by a court. But it could require you to forfeit some possessions or repay your debts over time, depending on which bankruptcy option you choose. The damage to your credit score will also be significant.
If you are able to work out some debt forgiveness, that’s great. But that doesn’t mean you’re out of the woods. The IRS considers forgiven debt to be taxable income. So in a sense, you’ll actually wind up having to pay a bit of any forgiven amount.
You won’t be able to get all of your debt forgiven with any method. But if you can come to an agreement, you should get at least 30% forgiven, and possibly even as much as 80%. Credit card issuers actually set aside part of their budget as a “Provision for Credit Losses” because they know they won’t get some of the money they lend back. For example, in 2019 Chase set aside over $5 billion for forgiven/unpaid debt.
As long as you know what strategies to use, you should be able to cut down at least some of your debt. Below, we’ll go through each strategy to help you find as much debt forgiveness as possible.
Credit Card Debt Forgiveness Strategy 1: Settlement
Credit card debt settlement is when you work out a deal to pay part of what you owe as a lump sum in return for the creditor or collections company forgiving the rest. This is the most straightforward form of debt forgiveness, but it’s still tough to pull off.
The idea is to find a payment amount that satisfies your debt collector but is still affordable for you. And to get your creditor to agree to it, you’ll need some good negotiation skills – or to find someone who can represent you. You can hire a debt settlement company to do the talking for you, but you’ll likely owe them fees for every successful settlement. So if you’re in debt, doing it yourself may be your best option.
How to reach a settlement to get credit card debt forgiven:
- Prepare yourself. Figure out how much you owe and the monthly payment you can afford.
- Call your debt collector and explain your situation. Present the facts and explain why you can’t afford the current payment schedule.
- Negotiate. Start by proposing a reasonable lump-sum payment but not the maximum amount you can afford. Adjust your next offer according to the debt collector’s counteroffer.
- Get your settlement in writing. A written and signed letter from your creditor with the terms of the settlement makes the agreement legally binding.
- Pay your lump sum. After you pay, confirm with the debt collector that your obligations have been met. Also check your credit reports to make sure the status of your account has been updated properly.
- Pay your taxes. Forgiven debt is actually considered taxable income. So you’ll have to report it to the government via a 1099-C form and pay taxes on it.
For more tips, check out WalletHub’s do-it-yourself debt settlement guide.
Credit Card Debt Forgiveness Strategy 2: Statute of Limitations
There is a window of time during which a debt collector can viably use a court to enforce their collection. After that, they no longer have any legal claim to the money. That time limit is called the statute of limitations, and it starts at the time of your last activity on the account, whether that’s making purchases or payments. Depending on the state you live in, it will range from 3 to 15 years. After that point, the debt collector or creditor can still sue you, but you’ll win if you bring up the statute of limitations in court. If you don’t tell the judge about it, though, the debt collector will probably still win.
However, in order to try to get debt forgiven with the statute of limitations, you have to essentially ignore your debt entirely. That means not acknowledging you owe it and not making any payments on it. If you do either, the clock on the statute of limitations will restart.
Plus, fees and interest will build up while you wait. The debt collector will also have years to sue you if it so chooses. That’s a big risk. So in most cases, it’s probably better to try to work something out with the debt collector.
Credit Card Debt Forgiveness Strategy 3: Consolidation
Debt consolidation doesn’t quite count as credit card debt forgiveness in the sense that your principal balance does not change. But it can save you money on interest, which basically means you’re forgiving yourself some of your would-be credit card debt payments.
Here’s how to give yourself credit card interest forgiveness:
- Balance transfer. You can move the balance from credit cards and loans to a new credit card. Plenty of balance transfer cards have an introductory 0% APR for a certain number of months, allowing you to pay down your debt without accruing new interest. However, there’s often a balance transfer fee of 3%-5%.
- Personal loan. You could take out a loan big enough to pay off your debts that has an interest rate low enough to save you money. You may not be able to find such a loan if your credit is damaged.
- Home-Equity Loan. This is similar to a personal loan, but you use your house’s value as collateral. However, you might lose your house if you fail to pay back the loan.
Some organizations may advertise the power to help you with consolidation. Stay away from for-profit companies that will charge you. But there are nonprofits who can give you helpful advice on the subject.
Credit Card Debt Forgiveness Strategy 4: Bankruptcy
Bankruptcy can help you get some debt forgiven, but that comes at a great cost. For one thing, bankruptcy will seriously damage your credit for up to 10 years. So it should only be your last resort when dealing with debt.
Here’s how debt forgiveness works with bankruptcy:
- Chapter 7: Your credit card debts will be discharged by a court. But some of your assets will be sold to pay your creditors as much as you can. A lot of your property is exempt from liquidation, though, such as a family car, business tools, home equity, and personal belongings like furniture.
- Chapter 13: Your debts aren’t immediately discharged. The court will set you up with a 3-5 year payoff plan. But it may decide to reduce the total amount you have to pay.
For more information, check out WalletHub’s bankruptcy overview.
If you’re in too much credit card debt to afford your monthly payments, and other bill payments are starting to fall behind, you still have options. The best advice in this situation is to not put off planning. While timing is important with some debt forgiveness options, the sooner you plan your course of action, the better your odds are of getting out of credit card debt.
Just don’t count on getting too much debt forgiven. Act as if you’ll have to repay the full amount, while still trying to get at least a portion excused.
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