Debt Forgiveness

Debt forgiveness summary:

• When your creditor forgives a debt you owe, that’s debt forgiveness. 

• Debts are rarely entirely forgiven, except in cases of Chapter 7 bankruptcy. 

• A creditor may be willing to forgive part of your debt if they believe you lack the ability to repay it. 

Debt forgiveness definition and meaning

Debt forgiveness is what it sounds like: your creditor forgives your debt. Other than in Chapter 7 bankruptcy, debts are rarely totally wiped out. More often, the creditor forgives a portion of the debt. They may be willing to do this if they believe that you can’t afford to repay the debt in full. For the creditor, getting something is better than getting nothing.

Forgiveness is available for different types of debt, such as credit cards, medical bills, and student loans. For example, the federal government offers debt forgiveness programs for eligible student loan borrowers. Credit card companies may forgive part of your debt if it’s clear that you can’t afford to fully pay it back.   

Debt forgiveness basics

Debt forgiveness allows you to clear a debt for less than what you owe. The rest of the debt balance is canceled. 

Why would a creditor allow that? In the case of federal programs, debt forgiveness acts as an incentive to get borrowers to pay something toward what they owe.

For example, say you owe $40,000 in federal student loans and you work for a Head Start program. You might qualify to have your loan balance forgiven after 10 years of repayment through the Public Service Loan Forgiveness (PSLF) program. The government gets the benefit of your ten years of payments (and your public service), and you get to spend less to fund your education. 

Credit card debt forgiveness allows creditors to collect something on unpaid balances when it seems unlikely that a debtor will pay in full. It may be cheaper and quicker for a creditor to accept part of what you owe than to sue you for debt. 

Who qualifies for debt forgiveness

Eligibility for debt forgiveness is tied to the type of debt. With federal student loans, you typically need to do one of the following:

• Meet the requirements for PSLF

• Enroll in an income-driven repayment plan until the plan's repayment term ends

• Work as a teacher in an underserved community for a specified number of years

You may also qualify for student loan forgiveness if you become totally and permanently disabled. 

Credit card debt forgiveness is a little different since there are no standard programs. It's up to creditors to decide whether to offer forgiveness to a borrower. 

You might be able to get credit card debt forgiven if you:

• Owe money to unsecured credit cards 

• Have a financial hardship that makes it difficult to pay in full

• Can afford to pay a negotiated amount in a lump sum or a series of payments

The easiest way to find out if you're eligible is to talk to a debt expert or your creditors. Explain your situation and make an offer to pay a set amount toward the debt, with the rest forgiven. 

If you don't want to negotiate yourself, you could get help from a professional debt resolution company. Expert negotiators can work on your behalf to get your creditors to agree to reduce your balances.