Debt Forgiveness: Your Best Options

Elizabeth Johnson

Financial Advisor
Updated: 07/2019

Debt Forgiveness

In This Article

What are the Types of Debt Forgiveness?

Nobody likes being in debt. Moreover, no one enjoys the work that it can take to get out of debt. Therefore, it’s not surprising that so many people are interested in debt forgiveness programs. These programs offer a way for some people to eliminate large parts of their debt. However, debt forgiveness programs aren’t risk free, and there are some costs.

This article is designed to help you understand everything you need to know about debt forgiveness. We’ll cover what debt forgiveness is. Then we’ll look at a few of the most common types of debt forgiveness that consumers are interested in.

You should use this information to make informed decisions about your debt and financial planning. Debt forgiveness has the potential to help lots of consumers. However, you need to be aware of the costs and issues that come with debt forgiveness.

 

Debt Forgiveness

What is Debt Forgiveness?

Debt forgiveness is what happens when a lender or creditor officially considers your debt complete even if you haven’t paid back everything you owe. There are a number of different paths to debt forgiveness. There’s also different advantages and risks to different types of debt forgiveness programs.

The Advantages of Debt Forgiveness

The first advantage to debt forgiveness is pretty clear. You no longer have to worry about paying back the debt that was forgiven. Additionally, your lender or creditor should give you documentation that the debt was forgiven. This will prevent other companies from coming after you to pay the debt. It can protect you from debt collection efforts. It can also protect from you from accidents and mistakes on behalf your creditors.

Depending on the type of debt that’s forgiven, debt forgiveness can also help boost your credit score. Credit card debt forgiveness is the best example of this. Forgiven credit card debt can lower the amount of revolving credit you’re utilizing, which makes up 30% of your credit score.

Risks of Debt Forgiveness

However, there are some risks you face when it comes to debt forgiveness. First, debt forgiveness can hurt your credit score. That’s because a credit score is designed to show lenders and creditors how much of a risk you are when it comes to not paying back debts.

If your debts are forgiven and your creditor records those as settled for less than owed on your credit report, then your credit score will take a huge hit. This kind of entry will stay on your credit report for 7 years. It will impact your credit score less and less as the years go on, but you’ll see an immediate drop in your score.

Additionally, debt forgiveness requires a lot of paperwork. You need to be sure that you have kept up with this paperwork and keep anything that your lender sends you. That’s because mistakes happen. Sometimes old, forgiven debt is accidentally included in a bundle of bad debt that a creditor sells to a collection agency. The collection agency can attempt to collect on this debt even though it’s been forgiven. Therefore, having the appropriate paperwork is the key to protecting yourself from these kinds of collection attempts.

Finally, there are tax implications for debt forgiveness. The IRS considers most types of debt forgiveness as a form of income. Therefore, the amount of debt you have forgiven can be added to your income when it’s time to do your taxes. Unlike wages, where your employer pays income taxes for you over the year, debt forgiveness doesn’t have any provisions to cover the boost in your taxable income. That means a debt forgiveness agreement can leave you with a huge tax bill if you’re not prepared.

However, all of these risks can be managed. None of them are a reason to never seek debt forgiveness. It’s important to understand the risks and costs of debt forgiveness so that you can weigh them against the advantages. That will let you make an informed choice about your finances and financial future.

Debt Forgiveness

Student Loan Debt Forgiveness

Student loan debt is one of the fastest growing debt categories in the United States. In fact, as a whole, the country carries more student loan debt than any other kind of debt except for mortgages. That means there’s more student loan debt than credit card debt or auto loan debt.

A lot of student loan debt comes from the federal government. The government is one of the biggest student lenders in the country. Therefore, it has a lot of power in this market. The government has created several programs to help people get their student loan debt forgiven. We’ll cover some of those programs such as student debt relief now.

Public Service Loan Forgiveness (PSLF)

The most common type of student loan debt forgiveness comes in the form of public service loan forgiveness. This program is designed to help people who make a living by giving back to the community. The job you do isn’t as important as who you work for.

Public Service Loan Forgiveness takes place after 120 payments, or 5 years of payments. After that, you can get 100% loan forgiveness. This program is open lots of different professions. Teachers are the most obvious. However, you can also get public service loan forgiveness for working at a call center for government services like 2-1-1 or 9-1-1. You can also get forgiveness for positions at local museums, universities, and government offices. That includes people like ground maintenance workers, geoscientists, and more.

You can also get public service loan forgiveness by working full time at qualified non-profit organizations. These include things like animal shelters and rescue centers. If you work in the public sector, looking for student loan forgiveness can be a smart move.

Federal Perkins Loan Cancellation

This loan forgiveness program is specific to people who take out Perkins loans to get their education. It’s most often used by people that work in schools. However, it isn’t limited to teachers. Librarians, speech pathologists, counselors, and other education professionals can also qualify.

A Federal Perkins Loan Cancellation program is also open to other professions. Firefighters, police, nurses, public defenders, and others can qualify.

The program works by forgiving a certain percentage of your Perkins loan debt for every year of service. Eventually you can get up to 100% of your loan canceled.

NURSE Corps Loan Repayment Program

Nurses are one of the most sought after professionals in the economy today. Therefore, it’s no surprise that so many people are interested in attending nursing school. However, certified nursing programs can be expensive. Many people take out loans to pay for their education.

The NURSE Corps Loan Repayment Program helps people get loan forgiveness to cover the cost of their education expenses. You can qualify for the program by serving as a registered nurse, nurse practitioner, or nurse faculty member in a qualifying community.

Military Student Loan Forgiveness

If you served in the armed forces, then there are even more student loan forgiveness options open to you. One example of these programs is the Army’s College Loan Repayment Program. It pays one-third of your student loans every year for three years. It pays up to $65,000 in loan assistances. The GI Bill and other programs also offer veterans help with student loans. These programs are a great way to take advantage of the benefits you’ve earned from your service to the country.

Medical School Debt Forgiveness

Nurses aren’t the only medical profession in high demand. The country is also suffering a shortage of doctors. Unfortunately, medical school is one of the most expensive professional education options available. Therefore, it’s no surprise that so many medical students graduate with huge amounts of student loan debt.

Medical students can take advantage of some of the programs listed above. That includes Public Service Debt Forgiveness as well as various military student loan forgiveness programs. There are also other options for medical students. The National Institutes of Health has a loan repayment program. It offers awards to people who agree to a two-year contract to perform research funded by nonprofit organizations in the US.

Additionally, the Indian Health Services Loan Repayment Program can help. This programs will repay up to $40,000 in medical school loans. In return, the student agrees to work with the program for at least two years.

Debt Forgiveness

IRS Debt Forgiveness

Taxes can be a huge source of financial headaches. This is especially true as more people operate in the “gig economy”. That’s because these workers are technically independent contractors. As a result, they don’t have an employer contributing to their income taxes with each paycheck.

Standard employees, those that fill out a W-2, benefit from rules that force employers to send a portion of each paycheck to federal and state governments for income taxes. The amount that is sent depends on the information you provide your employer. However, most workers wind up overpaying on their taxes. That’s why many people get a tax return when the file every year.

However, independent contractors, or 1099 workers, don’t have taxes taken out of their pay. Their pay is still reported to the federal government though. That means they’re responsible for the entirety of their tax bill when they file. This catches a lot of people by surprise. The result is an increased amount of tax debt.

The IRS has a program called Fresh Start. Taxpayers that owe back taxes can use the program to seek forgiveness from tax debt. The most important factor is the taxpayer’s ability to pay. The Fresh Start program altered the minimum amount that taxpayers have to owe before the IRS can file a tax lien against them.

The program also outlined how the IRS can do offers in compromise. These are a special type of agreement that allow taxpayers to settle their tax debt for less than they owe. The IRS will accept an offer if it represents the most the agency can reasonably except to collect within a period of time. However, the IRS will not accept an offer if they think the taxpayer can afford the complete bill.

The IRS looks at lots of different factors to determine what someone can pay. These incline income and assets, debt obligations, and other circumstances.

If you owe the IRS a large amount of money and can’t pay, you can seek debt forgiveness through the Fresh Start program. The IRS will make an assessment about your ability to pay your tax bill. As a result, you could settle your tax debt for pennies on the dollar if you’re truly unable to pay. Read our tax debt help article for more in depth info.

Credit Card Debt Forgiveness

Credit card debt forgiveness is a bit trickier to pull off. After all, unlike student loans and tax debts, credit card companies are for-profit organizations. That means they’ve got a lot of incentives to try and make you pay everything that you owe. There’s also no law or rule that forces credit card companies to forgive your debt outside of bankruptcy.

That doesn’t mean that it’s impossible to get credit card debt forgiveness. Credit card companies are willing to work with people that are in danger of falling behind on their payments. The first step you should take if you’re not sure you’ll be able to make a payment is to contact your credit card issuer. You should ask to talk to the hardship department. They’ll be able to tell you what your options are. The company might temporarily lower your interest rate. They may even give you a 12-month break from paying any interest at all.

The next option for credit card debt forgiveness is to seek help with a debt management agency. The agency will negotiate with your creditor on your behalf. They may be able to work out a modified repayment plan. They also might be able to prevent negative credit score impacts from happening.

However, some people can’t act in time to prevent problems. If your credit card debt is sent to a collection agency, then you might be able to reach a debt settlement agreement. That’s an arrangement where you pay less than you owe. The part of your debt that you don’t pay is considered forgiven.

That could still have tax implications, as the government will consider it to be income. You’ll still wind up paying less than you would if you paid back the full debt, but it’s an important fact to keep in mind.

Medical Debt Forgiveness

Unlike student loans and IRS debt, there’s no specific government program to help people settle medical debt. However, you do have some options. Hospitals and doctors understand that people need their services regardless of their ability to pay. Therefore, there are a few standard procedures that most medical organizations will do with someone that has an outstanding debt.

All of your options involve negotiating with your debt holder. You can do this on your own or you can hire a debt management company to help you. The goal is to negotiate debt relief and even some debt forgiveness from the hospital or doctor.

The first option that most organizations offer is reduced or deferred interest. Using this option, you might be able to save a lot on your medical bills. Hospitals and doctors are likely to agree to this plan because it means they’ll still be getting paid something. That’s far better for them than not collecting anything on the debt.

Also, most large medical providers have a financial assistance department. The programs offered vary from location to location. However, these departments are set up to help you pay your bills without causing you undue hardship.

Some hospitals are also willing to forgive debt completely. They’ll only do this if they’re fairly certain that you can’t and won’t be able to pay the bill at all. Hospitals have an incentive to do this because they can get a discount on their taxes when they forgive debt. That’s because a hospital is a business. Businesses are able to write off a certain amount of “bad debt” or uncollectable debt every year.

Best Way to Get Medical Debt Forgiveness

The best way to get medical debt forgiveness is to have ample paperwork to back up your claims. You need to be able to show that, at your current income, you won’t be able to pay the debt. This paperwork should include things like pay stubs, tax returns, bank statements, and more. This will demonstrate that you truly have a hardship situation, and you aren’t just trying to avoid your bill.

Mortgage Debt Forgiveness Act of 2017

Mortgage debt is notoriously hard to forgive. Banks and mortgage lenders are very unlikely to simply write off your debt. That’s because a mortgage is a type of secured debt. That means your house acts as collateral for the loan you used to buy it. If you don’t pay your debt, then the bank can take your home and sell it to recoup their losses.

One of the most tragic situations occurs when someone is upside down on their mortgage. That means they owe more for the mortgage than their house is worth. If they sell their house, or if their house is foreclosed on and the bank sells it, they’ll get less than they owe.

This is called a short sale. It can be devastating to consumers. That’s because you’re still liable for the mortgage debt you have even though you don’t own the home anymore. Depending on the nature of the housing market and your mortgage, that can result in a huge pile of debt. This can prevent you from getting another home. It can also have a huge negative impact on your credit score.

There are some banks that are willing to forgive mortgage debt after a short sale. More and more banks are willing to do this. However, this creates another problem for people. The forgiven mortgage debt counts as income according to the IRS’s rules.

Thankfully, there are options for people. The Mortgage Debt Forgiveness Act of 2017 allows people to avoid being taxed on any debt forgiveness from a purchase money mortgage on their primary residence.

It’s important to note that there are exceptions to this rule. You can only use it for your primary residence. Moreover, it needed to be your primary residence for 2 of the last 5 years.

Debt Forgiveness

Debt Forgiveness and You

There are lots of different debt forgiveness programs and options out there. It’s important to understand all of your options before you make any decisions regarding your outstanding debt. You want to ensure that the choice you make is the best one.

Moreover, you want to ensure that you’re making the best choice for your long-term financial health as well as your immediate needs. Carefully consider the different risks and consequences to each of the debt forgiveness options you apply for. Be sure that you can cover any increased tax bills. Also ensure that you can follow through on any service commitments for the required period of time.

It’s also important that you understand the credit score implications of any debt forgiveness program. If you’re planning on buying a house or car or making some other kind of major purchase in the next couple of years, then you might be better off seeking ways to pay your debt without looking for debt forgiveness.

That’s because the hit to your credit score could wind up preventing you from getting approval for your house or large purchase. Even if you get approved, the increase you’ll face in interest rates can wind up costing you much more than your original debt.

Debt forgiveness is an option for many people. You just need to make sure it’s the right option for you. A complete understanding of the impacts of debt forgiveness will allow you to make informed decisions about your financial present and your financial future. Use the information from this article to start yourself down the path to sound financial planning. Debt can come and go, what matters most is how you let that debt impact your life.

FAQ

This FAQ list offers quick answers to questions many debtors have about debt forgiveness and the programs available to them.

The Basics

This section offers an introduction to debt forgiveness and explains what the process entails.

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What does it mean to forgive a debt?
When creditors forgive a debt, this involves alleviating a debtor of their financial obligations and inhibiting its growth. Overall, debt forgiveness programs help to eliminate large parts of their debt.
How do I get debt forgiveness?
By speaking to the appropriate organizations, specifically the ones you owe debt to, they can work with you to help you eliminate your debt.
Does debt forgiveness work?
Yes, debt forgiveness works. The main stipulation is the consideration of the discharged debt as an income that must be taxed. Forgiven debt must be reported to the IRS if not, you may be penalized.
How does debt forgiveness work?
Debt forgiveness involves having your debt forgiven or dismissed by the lender. In some situations, the full amount for the debt is forgiven, or a decreased amount is accepted for repayment.
How to get creditors to forgive debt?
If you have debt, you can negotiate a settlement with your debtors. By offering a lump sum that can be paid, you can likely receive a resolution that is agreeable on both sides.
What does cancellation of debt mean?
A cancellation of debt occurs when a creditor absolves a debt. In this situation, the individuals in debt receives a 1099-C report indicating the forgiven debt amount as income.
How to ask for debt forgiveness?
To request debt forgiveness, you must communicate with your debtors. This can be done by contacting the department directly such as by phone or you can send them a letter detailing your financial situation.
How to eliminate taxes on debt forgiveness?
It is virtually impossible to evade taxes on forgiven debt as any debt that is discharged must be reported to the IRS as a part of your overall income. Typically, only individuals that qualify under the mortgage forgiveness debt relief act of 2007 are able to evade taxes on their debt.
How to write a forgiveness of debt letter?
Address the letter to the debtor’s credit department. In the communication, be sure to include your inability to meet payments due to your income and provide supporting documents. Also, request that they dismiss the alleged debt they claim you owe.
How to apply for debt forgiveness?
To apply for a debt forgiveness program, it is best to go through a debt consolidating organization. They will offer you best the advice and guide you through the process.
Can you get a collection agency to forgive your debt?
Collection agencies advocate on behalf of the creditor to collect debt that is owed. They cannot forgive your debt. To have debt discharged, you must speak directly with the creditor to negotiate a suitable amount.
How does debt forgiveness affect credit score?
If you are forgiven on any debt, it is cleared from your credit report. As a result of this, your credit score can partially improve as you are viewed as being more financial stable but an impression is still left on your name and credit score.

Credit Card Debt Forgiveness

If you are of the many people dealing with credit card debt, this section offers answers by explaining how you can be forgiven of this debt.

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Can you get credit card debt forgiven?

Yes, but the process is more complicated, as credit card companies expect for you to pay off your debt. However, by speaking with your credit card company and a debt management agency, an agreement can be reached to minimize your debt.

Can you settle credit card debt?

Yes, credit card debt can be settled. Debt settlement can be reached if sent to a collection agency, or through communication with the credit card company or another debt reconciliation organization. Read more to determine if this is best way to pay off credit card debt.

Can a credit card company take your Social Security?
While credit card companies are adamant on collecting money that is owed, there is a limitation. They cannot take your social security income, especially if this is the only funds in your bank account.
What is debt forgiveness on a credit card?
Debt forgiveness on a credit card is a bit different in comparison to other financial pardons. It is not completely absolved. However, a truncated amount in settlement is usually required while the remaining balance is forgiven.
Can you go to jail for unpaid credit card debt?
No, you will not face jail time if you have unpaid credit card debt. However, jailtime is reserved for individuals that are behind on their taxes of child support.
Will a credit card company forgive debt?
There are a few credit card companies that will forgive debt but that there are some that are reluctant in completely forgiving an outstanding debt. Though If all of the debt is not pardoned, a portion of the unresolved amount is likely to be discharged.
What is debt forgiveness on a credit card?
If you have an unsettled amount on your credit that is to be paid, credit cards can forgive or absolve the amount that is due. When this occurs, you are not expected to repay the declared deb amount.
Can Social Security disability be garnished for credit card debt?
No, social security disability cannot be garnished for credit card debt. Creditors are barred from this income. However, the federal government is not exempt from taking this money if you owe them taxes.
Is credit card debt forgiven after 7 years?
No, credit card debt will not be forgiven after 7 years. As long as you owe money on a credit card, this outstanding balance remains in place until it is paid off. However, credit card companies have a certain amount of time in which they can sue you for the balance owed.
How to negotiate credit card debt forgiveness?
In an effort to negotiate credit card debt forgiveness, it is always ideal to speak directly with the credit card company. By communicating with them, you can explain your financial condition and work cooperatively to come to an agreement.
What is the statute of limitations for credit card debt?
The statute of limitations is a ruling that dictates the period in which legal action can be implemented. For credit cards, the statute of limitations on most debts ranges from 3-10 years but can vary depending on the state.

Cancelled Debt and Taxable Income

Many debtors believe that if they are forgiven of debt, they no longer have to be concerned about it. However, if you are discharged of debt it is considered taxable. These group of questions and answers offer further information.

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Is Cancellation of Debt ordinary income?

When debt is cancelled, debtors are issued Tax Form 1099-C by their creditor. The forgiven debt is considered a taxable income, hence debtors are expected to report this as ordinary income.

Is debt forgiveness taxable?
If you have been forgiven of your debt, you are expected to claim the pardoned amount on your taxes, as this is considered an assessable income.
What is the tax rate for debt forgiveness?
The tax rate ascribed to forgiven debt is dependent on your average tax rate. So, for example if your average tax rate is 25%, you are expected to pay 25% of the amount that is forgiven.
Do you pay taxes on loan forgiveness?
Yes, any loan or debt that has been forgiven, cancelled or discharged on any repayment program is considered taxable income and must be reported by the debtor.
Is discharged debt taxable?
Yes, if your debt is discharged, this is considered taxable income and you are expected to include this amount as a part of your gross income and report it to the IRS.
What is a 1099 C Cancellation of Debt?
The 1099 C Cancellation of Debt is a form that is generated for persons that have been discharged of their debt. This form must be completed as the cancelled debt is considered taxable income.
What does it mean when you receive a cancellation of debt?
If you receive a cancellation of debt, this implies that payment for your debt is no longer required as it has been forgiven. Tax form 1099-C must be completed so that you can report the discharged debt to the IRS.
How long can you legally be chased for a debt?
Creditors have limitations on how long they can request money from you. The amount years they are allowed to contact you is dependent on the state you live in. However, the standard number years in which they can legally contact you ranges up to 15 years but this can vary.
How long can you be chased for a debt?
The statute of limitations decreed by each state indicates how long you can be chased for a debt. You can be contacted up to 15 years but creditors have about 4-6 years to sue you for any debt.

IRS Debt Forgiveness

Being forgiven of debt owed to the IRS can be complicated but it is not impossible. These set of questions and answers provides insight on debt owed to the IRS and how you can be discharged.

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Can you go to jail for not filing a tax return?

If you fail to file your tax return or it is purposely filed in error, you can face jail time. You will have to spend at least 5 years in prison.

Does the IRS forgive tax debt after 10 years?

Yes, the IRS has 10 years to forgive your tax debt. If an attempt is not made to collect income taxes from you following your tax assessment, and 10 years has passed, your tax debt will be pardoned.

What percentage will the IRS settle for?

In effort to determine the settlement value of an offer in compromise (OIC), a specific formula has to be used. This is used to decide whether it should be accepted or rejected.

How to waive IRS debt forgiveness?

When IRS debt is forgiven, the present financial condition of the taxpayer is taken into consideration. A partial amount may be discharged and the IRS will collect only what the taxpayer can afford.

Mortgage Debt Forgiveness

These set of questions and answers offer information on how mortgage debt is forgiven.

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What is mortgage debt forgiveness?

Mortgage debt forgiveness allows debtors to be discharged of any debt pertaining to their mortgage. The Mortgage Debt Forgiveness Act offers relief to taxpayers who owe any taxes on cancelled mortgage debt.

What is debt forgiveness act?

The debt forgiveness act, is actually the mortgage forgiveness debt relief act of 2007. It pardons homeowners from being taxed on a forgiven mortgage. 

What is the mortgage forgiveness debt relief act of 2007?

This act was created with homeowners in mind. It enables them to be excluded from paying taxes on settled debt, such as mortgage debt forgiven in relation to foreclosure on their principal residence.

What is mortgage forgiveness debt relief act 2015?
The mortgage forgiveness debt relief act 2015 is synonymous to the mortgage forgiveness debt relief act of 2007. It entails the same rules and is beneficial to homeowners.
Do I have to pay taxes on forgiven mortgage debt?
No, as long as your mortgage debt is forgiven under the Mortgage Forgiveness Debt Relief Act, you will not be required to pay taxes on it. However, you are sill obligated to report it.
Is debt discharged in Chapter 7 taxable?
No, debt discharged in Chapter 7 bankruptcy, is not considered taxable income. However, debt outside of this, will likely be deemed taxable income.
Is mortgage debt forgiveness taxable?
If a debtor qualifies for mortgage debt relief, the mortgage debt forgiven is not taxable. Debtors will not have to report the discharged debt as a part of their overall income.
Will the mortgage debt forgiveness act be extended?
The mortgage debt forgiveness act was issued in 2007 and set to reach its expiration in 2017. It was expected to be extended in 2018, however its status is still presently unknown.

Student Loan Debt Forgiveness

Student loans is increasing dramatically in the U.S. For debtors suffering from this overwhelming debt, this section offers details on the types of programs available to those dealing with this financial burden.

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Is forgiving student loan debt a good idea summary?

Many individuals cannot afford to pay off their student loans. In summary, being forgiven of a student loan is a good idea as it may help to improve the economy in the country as it will alleviate a substantial financial burden on debtors.

What student loans are forgiven?

Student loan debt is growing rapidly. The types of loans that are forgiven are medical school, Nurse CORPS, Military, Federal Perkins, and Public Service, are the types of loans that are forgiven.

What is student loan debt forgiveness?

Student loan debt forgiveness involves clearing students of their debts. However, there are various programs for this absolution but there are qualifications that must be met.

Who qualifies for student loan debt forgiveness?

There are a variety of student loan debt forgiveness options available to students. Qualifications for the program are dependent on the forgiveness program for which you qualify. For example, nurse practitioners may be eligible for the Nurse CORPS program.

Elizabeth Johnson


Elizabeth is an expert on Debt Consolidation as she provides helpful advice to people who are dealing with debt problems. She graduated college with a BS in Finance. After college, she took a job working at a non-profit debt counseling program. It was at this position where Elizabeth honed her expertise for helping people understand how different financial products work and finding ways to help people pay off their debts.

 

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