- Credit Card Debt
Credit card forgiveness is when some or all of a credit card debt is wiped clean, reducing the borrower’s obligations and helping them to improve their financial situation.
Loan forgiveness works in a similar way, but as you might expect from something that sounds so philanthropic, it’s not quite that simple. Credit card companies are there to make a profit, after all, and they’re not going to commit to something that isn’t in their best interests.
How Credit Card Debt Forgiveness Works
Some debts can be forgiven based on hardship, death, and public sector employment. Such is the case with student loan forgiveness, which we’ll discuss in more detail below. But in this case, you’re working with for-profit credit card companies, not the federal government, so they tend to be a little less forgiving.
There are several ways you can have your credit card debt forgiven, some more preferable than others:
Debt Management Plan
Debt management is offered by non-profit credit counseling agencies and credit unions. It typically follows hardship and results in the creation of a manageable repayment plan. The company will negotiate with your creditors and then seek to clear all of your current debts in exchange for one larger one.
You will be expected to make a monthly payment on your debt management plan, with the money going to pay your creditors. It makes your debt more manageable and puts more money in your pocket every month, but it’s not without its issues.
The company may request that you close all but one of your credit cards and that you use that card only in emergencies. This will impact heavily on your credit score in the short-term and may take some time to recover.
As with all forms of debt consolidation, it may also extend the length of your loans, which will increase the total interest that you pay in the long-term.
Debt Settlement Companies
You can hire specialist settlement companies to negotiate with your creditors and clear your debts for a single, lump-sum.
These companies specialize in debt settlement and by law, they can only take their fee when the debts have been settled, at which point the debtor has typically saved between 40% and 60% on the original balance.
The debt settlement process begins with a free consultation, during which you will be guided through the process and then asked to sign a contract. The debt settlement specialist assigned to your case may then ask you to move money to a secure third-party account, after which they will begin contacting your creditors.
They will try to convince your creditors to settle for an amount much less than the current balance, promising them a lump-sum payment if they do. Creditors often agree because they know that if they refuse, the debt may default, at which point they’ll be forced to sell it onto a debt collector and lose a substantial sum of money in the process.
Debt settlement is the most common form of debt relief and it’s also one of the most effective, but it can do serious damage to your credit score if you’re not careful.
The debt settlement company (there are many of these out there, including National Debt Relief) may request that you stop making monthly payments, thus increasing the money you have to settle debts.
As you can imagine, this is a very risky thing to do because it will trigger an avalanche of missed payments, each of which will be reported to the main credit bureaus, decimating your credit report in the process. Settled amounts may also be considered taxable income, although this will depend on your location.
Debt settlement, therefore, is something you either need to approach with caution or only consider when you are already in a very difficult place financially.
Personal Debt Settlement
You don’t need an experienced debt settlement expert or company to settle with your creditors. This is a process you can complete yourself. It will save you money and if you approach with confidence and a little forethought, it won’t take that much of your time. The following debt settlement process works for all unsecured debt but is especially effective for credit card debt:
- Do Your Research: There’s a reason debt settlement lawyers and companies make a lot of money and are in demand. These experts have the skills and experience to make this process work—you don’t. It’s something you can do yourself, but you need to make sure you’re prepared and have spent plenty of time researching the subject.
- Find a Money Source: The more money you have, the easier it will be to settle debts. Debt settlement firms often require you to save for several months or even years before you begin seeing results and it’s no different when you’re doing it yourself. If you have access to a money source, such as savings or investments, consider using it. It’s good to have savings; it’s better to be 100% debt-free.
- Start Saving: Unless your money source allows you to cover at least 50% of your current debt, you need to start saving more. Put all the money together in a bank account reserved just for the debt settlement process.
- Make a Decision: You need to decide whether you want to keep making your monthly payments or not. We would never advise you to stop paying your creditors unless you’re aware of the consequences, but there’s no denying that it will improve your chances of settling big and settling early.
- Begin: You don’t need to wait until you have all the money before you begin—as long as you have enough to cover one of your debts then you can make a start.
- Negotiate: You can negotiate with your creditors or with a collections agency, depending on who has the debt. The older it is and the more payments you have missed, the more inclined they will be to settle, but your offers are valid even on clean debts.
- Be Patient: If your offers are rejected, just wait, revaluate your situation, and then make another one. This process takes a long time. Even if you hire a skilled debt settlement agency and have a large sum of money to give them, the process can still take 3 to 5 years to complete.
Bide Your Time
First things first, we just want to be clear that this is a terrible option. It’s not a form of debt relief and while it will help you to get rid of your unsecured debts, it will do so in a way that damages your credit even more than debt settlement.
Simply put, all debt has a statute of limitations, one that differs from state to state. If this time passes, your creditors can’t legally sue you. They can ask that you repay your debts, and if you agree you may void the statute of limitations, but you’re not legally obliged to repay.
Sounds simple, right? You just bury your head in the sand and wait for 4 to 10 years and you’re good. Except, not quite. Your FICO Score could be destroyed in that period and you may also be sued.
At the very least you’ll have debt collectors hassling you every minute of the day as your creditors will likely sell your debt after just a few months.
There are two forms of personal bankruptcy: Chapter 7 and Chapter 13. These have different effects on your credit score and they are structured differently.
Generally, Chapter 7 will seek to liquidate your assets, repay all debts and then give you a fresh start, while Chapter 13 will allow you to keep many of your assets and create repayment plans.
Both are very destructive with regards to how they impact your credit score and your life and that impact will remain for years, so it’s not a decision to be taken lightly.
Other Types of Debt Forgiveness
Many of the methods we discussed for credit card forgiveness also apply to loan forgiveness and may work for other forms of unsecured debt as well.
The only exception is for student loan forgiveness, where you have many more options and can actually get all your loans forgiven under certain circumstances.
Your options are pretty limited where loan forgiveness is concerned. This is especially true if it’s a home loan or car loan, because your creditors have a sizeable asset they can claim if things start to go south for them.
However, debt settlement and debt management are both a form of loan forgiveness and you could also look into bankruptcy.
It’s not loan forgiveness in the strictest sense, nor is it easy, but as discussed at the outset of this guide, nothing is when it comes to debt and loan forgiveness.
Student Loan Debt Forgiveness
There many ways to get your student loan debt forgiven, including programs aimed at teachers, nurses, doctors, and individuals in the military.
These loan forgiveness programs are based on strict criteria and all concern federal student loans. Generally speaking, student loan forgiveness programs can be grouped into the following:
- Employment-Based Forgiveness: Nurses, doctors, teachers, soldiers, and other public service works can qualify for partial or full student loan forgiveness. There is qualifying criteria to consider, including the size and length of your student loan debt, but you can discuss this with your loan servicer.
- Income-Based Forgiveness: If you’re suffering from hardship then you may qualify for refinancing/consolidation or loan forgiveness. You will need to contact your loan servicer to discuss this option and they will look at your finances, including your ability to make payments.
- Death Forgiveness: This is one form of loan forgiveness that you won’t be eager to sign up for, but it’s worth mentioning, nonetheless. All federal student loans will discharge as soon as you die, and while that might not be much help to you, the same will apply if your co-signer dies. There are exceptions for private student loans, but the main lenders will also forgive the debt if the borrower or co-signer passes away.
We have written extensively about student loan forgiveness elsewhere. Click the link to be taken to this guide and learn more about this subject.
Summary: Forgiveness, but Not as We Know It
Student loan forgiveness is real and much more generous and forgiving than you might think. However, the same can’t be said for credit card and loan forgiveness.
They can often create more problems than solutions and are decisions that you really need to think about.
Read this article in full, take a look at our many other guides on specific topics like debt settlement and debt management, and leave your decision until you know exactly what you’re doing and how it will affect you.