Credit Card Debt Forgiveness: What You Need to Know

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Credit card issuers are not likely to offer outright credit card debt forgiveness. They are in business to make money and don’t make money by forgiving debts.

That said, you may still be able to negotiate a payment plan that gives you more time to pay or reduces your interest rate. And in some cases, it may be possible to negotiate a settlement for less than the amount you owe.

What You Need to Know

Debt forgiveness occurs when a creditor agrees to write off all or part of a debt that you owe. For example, if you owed $10,000, a bit higher than the average consumer, and the creditor agrees to settle for $5,000, the creditor has forgiven $5,000 worth of debt.

Credit card issuers lose money when they forgive a debt. That makes them reluctant to forgive. They will sometimes make exceptions if they think the alternative to a settlement is writing the debt off completely.

If You’re Struggling, Act Quickly

If you know you won’t be able to make a credit card payment, take the initiative. Don’t wait until multiple late payments have damaged both your credit and your credibility. 

Most credit card issuers are willing to work with customers who are under financial stress, especially if the stress is caused by circumstances beyond your control.

They may not forgive debt outright, but they may offer you an extended payment plan and potentially a reduced interest rate. They may also agree not to report a late payment to the credit bureaus.

Making the first contact before you make a late payment will demonstrate good faith, make negotiations easier, and could save your credit score from damage.

Negotiate with Creditors or Debt Collectors

You can manage debt on your own, and it’s often the cheapest and best way. You’re in charge of the process, you won’t be paying anyone, and you know who you’re dealing with.

You can negotiate with creditors on your own. You can offer a lump sum settlement or a payment plan. You’ll need to be firm and persistent. Don’t expect a creditor or collection agency to simply roll over and accept your first offer.

Follow these steps.

• Know your rights. Debtors have clear rights under the Fair Debt Collection Practices Act (FCPA), and you should know what they are. Be aware of the special rules for medical debt and the recently adopted changes to the FCPA under Regulation F.
• Know what you can pay. Before you contact your creditor you should know what you can afford to pay. Be realistic. Making an offer you can’t meet could make things worse.
• Know who you’re talking to. Get the name of the person you speak with and make sure that they have the authority to negotiate a deal.
• Don’t start with your best offer. Leave yourself some room to negotiate. Your first bid should be no more than 50% of what you are prepared to pay.
• Be patient. The process may take several calls and several days.
• Get it in writing. If you close a deal, ensure you get a written, signed agreement from the creditor.
• Keep your side of the deal. If you agree to a deal and don’t make the payments your negotiating leverage is gone. Your account could go to collections or you could be sued.

Three things to remember.

• They know your finances. Your creditors have access to your credit report, so they have an idea of what your financial situation is. Don’t lie, it won’t help.
• Collection agencies pay an average of four cents for every dollar of debt they buy. If you are negotiating with an original creditor they’d rather make a deal than take that pittance. A collection agency can earn a profit from a relatively small settlement.
• Use the B-word… carefully. If you are under severe financial stress, mention that you are considering bankruptcy. Credit card debt is almost always discharged and they’d get nothing. Remember that they have your credit report, so don’t try this if it isn’t true.

If you are persistent and you have good reasons for being unable to pay, there’s a good chance of negotiating a settlement that includes some credit card debt forgiveness.

Check out this video for some negotiating tips and tactics:

Ask About Credit Card Hardship Programs

Many credit card companies offer hardship programs designed to assist customers that are in financial trouble due to circumstances beyond their control. These typically include:

• A pay cut
• Unemployment
• A serious illness or injury
• A family emergency
• Divorce
• A natural disaster

You will need to provide evidence of the hardship. Most card issuers that offer these programs do not advertise them. You will have to ask if your issuer offers a hardship program.

Hardship programs do not generally involve outright forgiveness. Your issuer may offer an interest rate reduction, an extended payment plan, or both.

For example, many credit card companies offered programs to help customers through the COVID-19 pandemic, when some businesses had to severely curtail operations due to public safety requirements. The hardship programs included ways to:

• Lower or defer monthly minimum payments
• Have late fees waived or refunded
• Reduce your interest rate
• Establish a payment plan to pay off existing balances

Credit Card Debt Forgiveness May Have Tax Consequences

Getting a debt forgiven is a huge relief, but don’t relax right away. The forgiven debt is considered taxable income. The IRS has this to say:

“In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs.”

Source: IRS Topic 431

If you have secured debt, like a car loan or mortgage, the creditor can seize your collateral if you don’t pay. For tax purposes, the seizure is treated as a sale of the property to the creditor. You must report the value of the debt as income.

If a creditor forgives more than $600 worth of debt, they will provide you with an IRS form 1099-C showing the total amount forgiven. You’re responsible for reporting smaller amounts on your own.

There are some exceptions to this rule, which are laid out in the IRS link given above, but they are quite limited and will not apply to most situations. One notable one is that student loan forgiveness under existing federal programs is not considered income.

Does the Government Help With Credit Card Debt Forgiveness?

The U.S. government does not offer any program that will help you pay your credit card bills or negotiate credit card debt forgiveness. There are still government programs that could help you.

• If you’re being harassed over a debt that isn’t yours or if you believe a debt collector is acting illegally, the Federal Trade Commission (FTC) or the Consumer Financial Protection Bureau (CFPB) may be able to help.
• Programs like SNAP (food assistance), Medicaid, and LIHEAP (utility bill assistance) will not pay your credit card bills, but they can help with other expenses so that you can put more money into credit card debt payments.
• The Servicemembers Civil Relief Act provides debt relief for active service members, reservists on active duty, and some other federal employees. It limits interest rates and protects against foreclosure, repossession, eviction, and civil judgments.

If you have serious credit card debt problems you probably have issues with other financial problems as well. The programs above may help.

How Does Credit Card Debt Forgiveness Affect Your Credit

The impact of credit card debt forgiveness on your credit report will depend on the form of forgiveness involved.

If you negotiate a settlement and pay less than the original amount of the debt, the debt will be noted on your credit report as settled for less than the original amount. That will harm your credit.

If you negotiate a payment plan or a reduced interest rate, your account will remain in good standing and your credit score will not be damaged.

You can minimize credit damage by contacting your creditor and negotiating as soon as possible. Start before you miss a payment. If you wait until you’ve missed multiple payments you will hammer your credit and risk having your account charged-off or sent to collections.

Work to Get Your Credit Card Debt Under Control

Negotiating a payment plan can help, but if you’re having serious trouble making credit card debt payments, you need to get to the root of the problem. You can look for professional help or do it yourself, but you need to step up and take action. Here’s where to start:

Debt Management Plans

Nonprofit credit counseling agencies offer free consultations to help you get a handle on your debt problems. They may recommend a debt management plan.

If you sign up for a debt management plan you will make a single monthly payment to the credit counseling agency. They will distribute the money to your creditors. They will also negotiate with your creditors for lower rates, better terms, and potentially some level of forgiveness.

You will pay a fee to the agency for the service and you may be required to close some credit accounts.

Debt management plans are challenging and many clients fail to complete them, but if you can stay the course they are an excellent way to solve your debt problems. They are a way of consolidating debt without taking on new debt.

If you’re considering a debt management plan be sure to learn more about credit counseling and how to choose a credit counseling agency. Not all agencies are legitimate.

Credit Card Debt Settlement Companies

Debt settlement companies are for-profit businesses that will try to negotiate a debt settlement for you. They will call the card issuer and negotiate on your behalf. Their fee is typically a percentage of the amount that they cut from your debt load.

If you need a settlement but don’t feel confident in your negotiating ability, a debt settlement company could help. You’ll need to be careful. Not all companies are honest and some may be outright scams. Check the reputation and reviews of a company before you sign on.

A debt settlement company may ask you to stop making payments on an account while they negotiate. This can be an incentive to the credit card issuer to settle, but it could also hurt your credit. Late payments will be reported and your account could even go to a collection agency.

Consolidate Your Credit Card Debts

Debt consolidation involves taking out a new loan and using it to pay off one or more old debts. You will make only a single monthly payment, which simplifies your finances. You may get a lower interest rate, and depending on the term of the new loan your payment may be smaller.

Consolidation does not involve credit card debt forgiveness or debt relief, but it can make your debts more manageable.

There are several ways to consolidate debts.

Balance Transfer Credit Card

A balance transfer credit card allows you to transfer balances from one or more new cards onto a new credit card. Balance transfer cards offer an extended interest-free promotional period, so you can concentrate your efforts on paying off the loan principal.

Remember these points.

• Pay your debt before the promotional period ends. Once the zero-interest period expires you’ll be back to paying high interest on your loan.
• Pay on time. Late payments may cancel the zero-interest period and put you right back to paying high interest.
• Watch your credit utilization. If the combined balances you transfer to your new card are close to the card’s limit, your credit utilization may be high and your credit could suffer. It may be worth it, but be aware of what could happen.

A balance transfer card can be an effective way to consolidate credit card debt, but you will need good credit to qualify for most good balance transfer cards. If your credit has already taken a beating this may not be the best method for you.

Debt Consolidation Loan

A debt consolidation loan is a form of personal loan. You borrow money and use it to pay off several other debts, and then pay off the new loan. You may be able to get a lower interest rate on your new loan, and depending on the loan term your monthly payment could drop.

You can use any personal loan to consolidate debt. Some personal loans are marketed specifically as debt consolidation loans. In these cases, the loan proceeds are typically paid directly to your creditors.

Debt consolidation loans are offered by many banks, credit unions, and online lenders. If your credit is badly damaged it may be difficult to get a loan at a lower interest rate than your existing debts.

Important note: if you have consolidated your debts, arranged a payment plan, or agreed to a debt management plan, it is critically important to stop taking on new debt. Lock your cards up if you have to. Adding new debt will put you right back into trouble.

Bankruptcy May Be Your Best Option

If there is no realistic way to pay your debts, bankruptcy is an option to consider. Bankruptcy can discharge credit card debts and other unsecured debts (like medical debt) and give you a fresh start.

Bankruptcy is expensive and time-consuming, though many of the costs can be reduced for low-income individuals. It’s not a decision to make lightly. 

You’ll need to decide whether bankruptcy is your best option and which type of bankruptcy you’d need to file. Most bankruptcy lawyers offer a free initial consultation that can help you decide whether it’s the right option for you.

You can also use Upsolve, a free app designed to help consumers navigate the bankruptcy process. 

The Bottom Line

If you’re stuck in the credit card debt trap, credit card debt forgiveness may seem like a dream come true. Don’t expect outright forgiveness — debts don’t just disappear — but there’s a good chance that you can negotiate a solution.

The solution might not be perfect. Negotiating a settlement will harm your credit and could leave you with tax liabilities, and a payment plan will still leave you responsible for the debt. It’s still better than doing nothing. If credit card debt has you down, take the initiative and act now!

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