Credit Card Debt Forgiveness: What It Is and How It Works

What is Credit Card Debt Forgiveness? 

Credit card debt forgiveness is when a lender or collection agency cancels some or all a borrower’s debt. It’s often carried out as part of a debt settlement plan and handled by a debt settlement company, but it’s also possible to negotiate debt forgiveness yourself. It’s important to note that there are no government debt forgiveness schemes and that any company stating otherwise is a scam.  

Debt forgiveness typically doesn’t mean the whole debt gets written off, but a portion. For example, if you owe $20,000 on a credit card and are struggling to make the minimum repayments, the credit card company may offer to cancel $5000 and arrange a lower monthly repayment for the remaining $15,000. Sometimes, the credit card company may have passed your debt on to a collection agency, in which case you’d be dealing with them. 

Although debt forgiveness can be helpful if you have a lot of credit card debt, it can have long-lasting effects on your credit rating and may make it very difficult to get credit in the future. There is also the chance that creditors will not accept an attempt at settlement, which could leave you in more debt if you’ve hired a debt settlement company. 

How Does Credit Card Debt Forgiveness Work? 

Credit card debt forgiveness works by negotiating with creditors to reduce the amount you owe. Because of its long-lasting effects and potential consequences, it's important to check out other debt relief strategies first.  

Debt settlement is the most common way to achieve credit card debt forgiveness, either through a debt settlement company or by taking a DIY approach. With a settlement company, you typically stop paying the debt in question while the company negotiates with your creditor. Then you pay the company an agreed amount per month, which is held until you've paid enough to settle the debt. The total amount is then passed on to the creditor. 

If you take the DIY route, you negotiate with the creditor yourself. Again, this usually involves stopping payments until an agreement has been made, then making regular payments until the negotiated amount has been paid off. 

One important thing to know is that the amount written off is classed by the government as income. That means you will have to declare it and you may have to pay tax on it. Make sure to check the tax implications of any settlement plan you consider. 

Advantages of Debt Settlement  

In the right situation, debt settlement can be a way back to financial health. Some of the advantages of using debt settlement include: 

• Reduces the amount you owe 

• Can help you pay off debts faster 

• May help to avoid bankruptcy 

Disadvantages of Debt Settlement 

Although it can be an effective way to clear credit card debts, debt settlement has several drawbacks, including: 

• Can damage your credit score 

• You may have to pay tax on the amount forgiven 

• Makes it difficult to get credit in the future 

• Debt forgiveness is not guaranteed 

Advantages	Disadvantages
Reduces the Amount of Debt You Owe – Settling debts allows you to pay less than the full balance.	Can Damage Your Credit Score – Missed payments and settled accounts can significantly lower your score.
Can Help You Pay Off Debts Faster – May provide a quicker path to becoming debt-free compared to minimum payments.	You May Have to Pay Tax on the Amount Forgiven – The IRS may consider forgiven debt as taxable income.
May Help to Avoid Bankruptcy – A viable alternative to filing for bankruptcy, which has more severe long-term consequences.	Makes It Difficult to Get Credit in the Future – Settled accounts remain on your credit report for up to seven years.
	Debt Forgiveness Is Not Guaranteed – Creditors are not required to accept a settlement offer.

Table: the advantages and disadvantages of debt settlement.

Who Qualifies for Credit Card Debt Forgiveness? 

To get credit card debt forgiveness, you’ll need to have long-standing unpaid credit card debt that you are unlikely to be able to pay. There are no fixed criteria for eligibility, and there are no guarantees that forgiveness will be offered, even if you have a lot of debt. 

When deciding whether to offer debt forgiveness, lenders look at various factors like missed payments, a significant drop in income, or a high debt-to-income ratio. You will have to show that you’re experiencing significant financial hardship and have very little chance of being able to pay the full amount. 

Can Credit Card Companies Forgive All Debt? 

It is very rare for credit card companies to forgive a borrower’s full debt, although it does occasionally happen in extreme cases. It’s more likely that the company will cancel a portion of the money you owe and suggest a repayment plan for what’s left. To get all your credit card debt forgiven, filing for bankruptcy is usually the only way. 

How to Get Credit Card Debt Forgiveness: Step-by-Step

As you might imagine, lenders are not keen on forgiving borrowers’ debts. But if you have been struggling to pay off your credit card debts for several months or more, it could be an option. Make sure to explore other routes first. 

If you do decide that debt settlement is right for you, the process will look like this: 

1. Consult a credit counseling agency: This is optional, but highly recommended. A credit counselor will help you understand the different routes you can take and how to apply for debt settlement or a debt management plan. They will also give advice on budgeting, saving, and other lifestyle adjustments.  

2. Choose a debt settlement company: Make sure to research debt settlement companies carefully and choose one that is accredited by a reputable organization such as the American Association for Debt Resolution (AADR) as there are many scammers operating in the space. Carefully check the fees they charge and watch out for companies that make unrealistic promises.  You could also skip the settlement company and negotiate with creditors yourself. 

3. Negotiate with creditors: Once you’ve hired a debt settlement company, they will contact your creditor or collection agency to attempt to work out a settlement. During this time, you’ll likely be asked to stop any payments to those creditors or agencies. If you decide to negotiate by yourself, you will have to demonstrate that you are unable to make the full payment. 

4. Get the agreement in writing: Make sure that you get a written copy of any agreement made and keep it safe. Verbal agreements are not binding, so beware of collection agencies that attempt to get you to accept one. 

5. Make the agreed payments: The only thing to do now is stick to the plan. Making the payments on time will help to heal your credit rating by improving your payment history. 

The Impact of Credit Card Debt Forgiveness on Credit 

Debt forgiveness can damage your credit score and make it more difficult to get credit in the future. However, if used responsibly it can be an effective way to reduce the amount you owe, making it easier to pay off the debt. This can have a positive impact on your credit score. It all comes down to whether you stick to the plan.  

Does Credit Card Debt Forgiveness Hurt Your Credit? 

Credit card debt forgiveness can hurt your credit score, but the good news is that the damage doesn’t last forever. The reason for the damage is that during the debt settlement negotiation process, you stop making the usual monthly payments while a new agreement is worked out.

This means that you will lose points for late payment, and the information will stay on your credit record for seven years. However, if you stick to the agreement and make regular payments, this will improve your payment history and have a positive impact on your credit score. 

It’s important to understand that any damage to your credit score is temporary, and it is always possible to rebuild. If debt settlement is the right choice for you, the effects on your credit score should not put you off. 

Alternatives to Credit Card Debt Forgiveness 

Because credit card debt settlement has serious drawbacks, it should be seen as a last resort. Before attempting to get debt forgiveness, there are several other options to consider such as credit counseling, debt consolidation, and bankruptcy.

Credit Counseling 

A credit counselor will work with you to help you understand your financial options. They'll go through your income and outgoings. They also make suggestions about budgeting, how you can reduce expenditure, and how to begin a debt management plan if that’s a viable option. 

There are hundreds of credit counseling agencies around the country. Research any potential counseling agencies carefully, and make sure to choose on that is accredited by a reputable body such as the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). 

Debt Consolidation 

Debt consolidation (link) could help you to make repayments more manageable and reduce the amount you pay overall. Consolidation involves paying off several debts with a new line of credit, usually a credit card or loan, which has a lower interest rate than consolidated debts. This means that you’ll pay less in the long run, as you’re paying less interest.

It’s crucial to check the terms of any new line of credit to make sure that it is giving you a good deal. Remember that introductory offers only last for a limited time and interest rates can increase significantly once they’re over. 

Bankruptcy  

In extreme circumstances, bankruptcy (link) might be the best option. There are several different types of bankruptcy, the most common being Chapter 7 (liquidation bankruptcy) and Chapter 13 (wage earner’s plan).  

Chapter 7 bankruptcy (link) is for people who have overwhelming debt and limited income. It involves selling (liquidating) the person’s assets to settle unsecured debts, with some debts potentially being written off. There is a means test to qualify, and some debts such as child support, taxes, and student loans are not covered. The process takes three to six months. 

Chapter 13 bankruptcy (link) is for people who have large debt and regular income and is a good option for those who don’t qualify for Chapter 7 bankruptcy or who want to keep their assets. The process involves agreeing a payment plan with creditors which typically lasts three to five years. Any debts remaining after this time may be written off. 

Bankruptcy stays on your credit record for up to ten years and has a very negative impact on your credit score. However, it is an effective way to “wipe the slate clean” and recover your financial health. 

Is Credit Card Debt Forgiveness for You? 

Credit card debt forgiveness might be the right choice for you if you have a lot of credit card debt and are finding it very difficult to pay it off. However, the process has several drawbacks and is not a guaranteed way out of financial struggles. As with all types of debt relief, it’s important to do careful research before choosing a path. A debt counselor will be able to help you navigate the options and make the choice that suits you best.