Having nightmares about your ever-growing mountain of credit card debt? You may be surprised to learn that according to a study by the New York Fed, the average American credit cardholder owed $6,569 as of Q4 2021. For many, that amount will take years to pay off.
Fortunately, whatever your balance is, there are many ways to reduce or even totally eliminate how much you owe. And believe it or not, credit card debt forgiveness is one of your options.
Credit card issuers rarely forgive all credit card debt, but some will occasionally accept a smaller settlement amount to clear the balance. However, there are several things to consider, including how debt forgiveness will appear on your credit report and whether it will affect your credit score.
This post aims to provide a complete guide on credit card debt forgiveness by answering the most common questions cardholders ask and explaining how to get credit card debt forgiven. If you're overwhelmed by the burden of your plastic, stick around as we reveal the key things you need to know about pursuing your debt forgiveness options.
What Is Credit Forgiveness?
Credit forgiveness, debt forgiveness, debt relief, debt settlement, debt cancellation: call it what you like; it essentially means that your credit card issuer agrees to forgive all or part of your credit card's outstanding balance. This can be anywhere from 30% to 80% of the owed amount. Typically, for a creditor to enter into such an agreement, you must qualify for a special debt relief program.
Although this sounds like an awesome solution for erasing debt, it's not always what it's cracked up to be. With this in mind, let's take a closer look at whether you can truly walk away from credit card debt scot-free.
Is Credit Card Debt Ever Forgiven?
Short answer: yes.
Long answer: yes, but creditors forgiving debt isn't some kind of altruistic act. Before you read any further, it's important to be realistic and realize that creditors are highly unlikely to give you something for nothing. It's going to cost you.
In most cases, you'll have to repay a portion of your balance for a creditor to even consider wiping out the rest. You'll also discover that debt forgiveness generally comes with penalties, which tend to hurt your credit.
Usually, a creditor will only forgive your debt if they think you'll file for bankruptcy or otherwise won't pay what you owe. They'll then enter into a debt settlement agreement since getting some money is better than getting no money at all.
Here are some reasons credit card companies might forgive or write off some or all of what you owe:
- You're considered "uncollectible." If your account becomes seriously delinquent, your credit card company will likely write off the debt. However, this is NOT debt forgiveness. Although your creditor will remove the debt from their books, it remains an asset that they can sell to a third party for collection. This can have legal implications, sometimes resulting in the garnishment of your wages or a judgment lien against your property.
- Your bankruptcy filing discharges your credit card debt. If you filed for bankruptcy and obtained a discharge from a bankruptcy court, you're no longer under obligation to pay your credit card balance. Again, this is NOT debt forgiveness, and the debt still exists. Although you don't have to pay it, bankruptcy is no picnic. Also, it matters if you have a cosigner because that person is then responsible for settling the outstanding amount.
- You offer a settlement. For example, you offer to pay $6,000 on a $10,000 balance with your creditor eating the difference. If you offer a lesser amount to settle the entire debt, they might agree, as it's less risky and cost-effective than suing. Depending on your particular circumstances, your creditor could also be aware that there's little chance of receiving the full amount—even through methods like garnishment. Normally, a credit card company will only consider any type of debt forgiveness if your account is more than three months overdue.
All three of these scenarios can have severe and long-lasting consequences for your financial future. However, if you're going to pursue debt forgiveness as an option, then offering a settlement or applying for a debt relief program is the best way to go.
How To Get Credit Card Debt Forgiven
Before we dive into ways to attain debt forgiveness and how the whole process works, you should know this one fundamental key to being successful: timing is everything.
Credit card issuers don't have an incentive to forgive your debt if you're current on your payments. Therefore, debt forgiveness or debt settlement is likely to work well only after you fall behind for a couple of months, better just before a creditor is about to charge off the account, and best after a creditor sells the debt to a collector. That's not to say you should purposefully let your credit card account fall into delinquency, but you want to be mindful of the flow of things if you do find yourself in financial hardship.
It's also crucial to keep in mind that missed payments are bad, but charge-offs are even worse. While the former can ding your credit score by as much as 100 points depending on your current credit score and how overdue the account is, the latter can knock off up to 150 points. Most creditors start to think about charge-offs around the 180-day-past-due mark, so you'll want to keep track of when you last made a payment.
Ideally, you should let creditors know as soon as your financial situation changes. Whether you're experiencing general cash flow issues, you've lost your job, you've been affected by a natural disaster, or you're going through any of the other myriad things that might prevent you from making a payment, you need to make your credit card issuer aware of what's happening. When you're actively involved right from the beginning, they're likely to view your request for debt forgiveness more favorably.
Getting your debt forgiven isn't an easy process, but there are two basic paths to credit card debt forgiveness:
1. DIY Debt Settlement
This is when you negotiate with your credit card issuer or debt collector directly. You'll need to—at the very least—explain why you can't make the minimum payment and establish how much you can afford to pay. Your creditor can then discuss available debt-relief options, such as partial debt forgiveness, debt settlement, and financial hardship plans that include pausing payments, lowering minimum payments, lowering interest rates, waiving late fees, and more.
In some cases, a creditor may contact you with a settlement offer that you can either accept or counter with an offer of your own. It's not common, but you might even be able to pay the settlement amount in a series of small payments instead of a lump sum.
2. Working with a Debt Settlement Company
If you have to settle multiple credit card debts, you can enroll in a debt settlement program through a debt settlement company. This type of service provider is often able to negotiate a lower settlement amount on your behalf.
It's important to note that a debt settlement company's service charges range from 15% to 20%, depending on the amount of debt enrolled in the program. There's also no guarantee of success, so this approach might not be for everyone.
The actual step-by-step process for both DIY debt settlement and debt settlement companies is the same.
5 Steps to Request Credit Card Debt Forgiveness
Step 1: Save up a settlement sum.
You'll need to have a lump sum payment if you want your credit card company to forgive a portion of your debt. If you're DIYing the process, save the money in a separate savings account. If you're using a debt settlement company, they'll create an account where you can deposit funds.
Step 2: Determine who owns the debt.
Usually, it's the original creditor. However, if your creditor already charged off the debt, a collections company will own it instead. Check your credit reports to ensure you approach the right debt holder.
Step 3: Make the offer and negotiate.
Once you generate enough funds, you or your debt settlement company need to approach your creditor and ask if they'd be willing to settle for a lesser amount and forgive the difference. Your creditor may make a counteroffer, so you'll need to negotiate until you reach an acceptable settlement amount agreed upon by all parties.
Step 4: Get the settlement offer in writing.
You'll want to ensure that no one can come after you for the remaining balance after you make the settlement payment. Ask your creditor to provide the settlement and debt forgiveness agreement in writing so that you have some form of protection in case you encounter problems in the future.
Step 5: Make payment.
Once you make the payment, your creditor will then discharge the balance. If you're working with a debt settlement company, their fees will apply, so you'll need to settle that, too.
One final thing you should know about this process is that it has tax implications. Since you're paying less than you owe, you may need to pay tax on your forgiven debt. In other words, if you pay that $6,000 on a $10,000 balance, you'll be taxed on the $4,000 difference. There are exceptions, though, so check with the IRS, your tax preparer, or an account familiar with debt forgiveness.
More like this: Medical Debt Forgiveness Act – What It Is & What It Does
Does Debt Forgiveness Hurt Your Credit?
The reality is that if you're exploring credit card debt forgiveness, your credit score has already taken a beating whether through missed payments or a charge-off. Since credit card companies don't forgive debt outright, but rather accept a lesser settlement amount, it's recorded on your credit report as a derogatory entry. This further degrades your score.
However, reducing your debt is a huge plus in the eyes of credit bureaus. As a result, debt settlement can actually improve your credit score over the long run. You'll simply need to wait for the derogatory entries to fall off your report, which can take up to seven years.
The Bottom Line
Credit card debt doesn't have to be your Everest, but you also shouldn't assume that a debt forgiveness fairy is going to wave a magic wand and make your credit card troubles disappear. The likelihood is that you will need to settle for paying a lesser amount. You also need to be aware that the process can impact your credit score in a variety of ways, so you'll need to weigh up your options and decide whether this is a path you want to pursue to eliminate your credit card debt.
- What Happens If You Don't Pay Your Credit Card?
- What Happens When You Get Served Papers for Debt? [ANSWERED]
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.