Credit card debt forgiveness: Is it possible?

Many people have credit card debt. If you’re struggling to pay your balance, you may be wondering if credit card debt forgiveness is possible. With credit card debt forgiveness, or debt relief, your credit card company agrees to accept a smaller amount than what you owe. 

It may be possible to reduce your debt to a fraction of your total balance. Let's review how credit card debt forgiveness works so you can find out if it's something you might qualify for.

What is credit card debt forgiveness?

Credit card debt forgiveness means your creditor decides to permanently cancel some of your debt. This could happen when your creditor understands that you may not be able to repay them in full because of a significant financial hardship you're experiencing. Partial payment is better than no payment, so if your creditor believes you genuinely can’t pay off the debt, they might be flexible.

With credit card forgiveness, your credit card issuer agrees to accept a smaller amount than the total balance you owe. Your credit card company also agrees not to come after you for the rest of your balance or report you to the credit bureaus as delinquent on the rest of your balance. Once the debt is resolved, it’s in the past.

Is credit card debt forgiveness possible? 

Yes, credit card debt forgiveness is possible. A credit card company could forgive a portion of your debt if you're experiencing a financial hardship such as an illness, unemployment, or divorce, and you can’t afford to fully repay your debt. You might need to provide proof of your hardship to get approved for credit card forgiveness. 

If you qualify, credit card settlement is possible even after your debt has been transferred to a collection agency.

When can you get your credit card debt forgiven? 

Creditors are typically willing to work with you when you have a significant financial hardship. That usually means you're already in default on your debt. If you’re keeping up with your payments, the creditor has little reason to believe you can’t continue to do so.

Financial hardship comes in many forms. It could be a medical emergency, a divorce, or the death of a primary breadwinner. 

If you’ve experienced a hardship that makes it difficult or impossible to repay your debt, you can ask your creditors about debt forgiveness. They may agree to be flexible if they’re convinced that you intended to pay them but genuinely can't afford to. 

How to get credit card debt forgiven

If you're wondering how to get credit card debt forgiven, here are a few options you can look at. Each option has benefits and drawbacks.

Option 1: Negotiate with creditors yourself

Anyone can negotiate a credit card settlement on their own. Contact your credit card company and explain your situation. This may take time and perseverance, but they might agree to lower your interest rate, waive late fees, give you more time to pay, or even reduce the amount you owe. 

For credit card forgiveness, a credit card company will generally require a financial hardship form. Before you fill out and submit this form, ask yourself if you can:

• Explain your financial hardship 

• Gather the required paperwork 

• Patiently deal with numerous calls and service agents

• Make a payoff offer to your creditor today

If you answered yes to everything, you may be ready to move forward. 

Negotiating with a credit card company can be stressful. If you’re worried you’ll feel intimidated, you may want to turn to a professional debt relief company for help. 

Option 2: Work with a professional debt relief company

If you’re not sure how to ask for credit card debt forgiveness or you just feel uneasy talking to creditors directly, you can consider working with a reputable debt relief service. They understand how credit card companies work and how to present your hardship and negotiate a settlement. 

A reputable debt relief company can:  

• Provide you with a free debt evaluation 

• Create a personalized plan for your situation

• Negotiate with your creditors on your behalf 

• Work to settle your debts for less than you owe

A debt relief program could lower your monthly payments, helping you make ends meet. While you’re in the program, you’ll make a single monthly payment into a dedicated account. The debt relief service will negotiate with each of your creditors to accept less than the full amount that you owe, but consider it payment in full.  

When an offer is accepted by a creditor and you’ve approved the offer, it’s paid out of that dedicated account. The debt relief company fee is also paid out of that account.

All of this is handled as a part of your debt relief program and typically takes two to four years. Working with a debt relief company could increase your chances of getting credit card debt forgiveness and make the process less stressful. You'll pay a fee for this service, usually a percentage of the debt you included in the program. 

Option 3: File for bankruptcy

Bankruptcy is another option to resolve your debts. Individuals typically file one of two types: Chapter 7 or Chapter 13.  

In a Chapter 7 bankruptcy, you could lose some of the things you own. A court-appointed trustee will sell any of the things you’re not allowed to keep in a bankruptcy case. That could include expensive or extra vehicles, high-value collectibles, investments outside of your retirement accounts, and luxury items. If you have a lot of home equity, you could be forced to sell the home. The money they get from the sale is used to pay back your creditors. Then, any unsecured debts that remain (if they were included in your bankruptcy) are wiped out. 

You can typically keep your clothing, furniture, and retirement accounts. You can also usually keep some equity in your home and car. You can’t keep a second home or investment property, or expensive jewelry or collectibles. Each state has its own rules about what assets are protected and which ones can be sold to pay off creditors.

Not everyone will qualify for Chapter 7. A court will decide if you qualify by looking at your disposable income. This is the money you have left over after you pay for your basic needs. 

Necessary expenses include things like groceries, childcare, toiletries, utilities, home maintenance, and home and car insurance. Rules about disposable income and necessary expenses also vary by state.

If your disposable income is greater than the court allows and you can't have your debts wiped out in a Chapter 7 bankruptcy, you'll be directed to Chapter 13.

Chapter 13 bankruptcy involves a three- or five-year monthly payment plan where you partially or fully pay back your debt debt. Any balances that remain when you finish the program are forgiven. 

A court-appointed bankruptcy trustee is responsible for collecting monthly payments and distributing the money to your creditors. All the creditors you include in your bankruptcy filing are required to participate. You don’t have to give up any of the things you own, but their value will be a factor when the court decides how much debt you have to pay back.

Filing for bankruptcy isn't free. It’s a good idea to hire a qualified bankruptcy attorney to help you file the required paperwork with the appropriate court. You don’t have to, but people who hire bankruptcy attorneys typically get better outcomes. You'll also pay court fees. Unlike debt relief, where a fee is charged only once a debt has been settled, attorney and court filing fees for bankruptcy are paid upfront. 

When is credit card debt forgiveness a good idea?

Credit card debt forgiveness may be a good idea if you’re struggling to keep up with payments, either because your debt has increased or your income has gone down. Credit card debt forgiveness could also be right for you if your hardship is ongoing, like an illness that's making it difficult to work. 

Settling debts could be a good idea if you had every intention of paying off your debt, but an unexpected financial hardship has made that difficult or impossible.

What is the downside to credit card debt forgiveness?

Credit card debt forgiveness is likely to negatively affect your credit score. When a creditor forgives a portion of your debt, that account may be reported to the credit bureaus as settled. From a credit score perspective, settled is better than delinquent but not as favorable as paid as agreed. 

A settled debt stays on your credit report for up to seven years. During this time, you may find it harder to borrow money or borrow money affordably. 

That said, most credit score damage comes from missing payments. Many people are already late on their bills when they decide to talk to their creditors. They may also choose to stop paying their bills so they can save money for settlement offers. If you already have late payments or collection accounts, debt forgiveness may not have a huge impact on your credit score.

Your credit score is a snapshot of the information in your credit file at the moment your score is calculated. As time passes and the information changes, so does your score.

Remember to look beyond temporary credit score damage. Your credit score is just one part of your financial health. Once your finances are stable, it’s easier to build a strong credit profile by paying your bills on time and keeping credit card balances low. 

Another potential downside is that for some people, forgiven debt is treated as taxable income by the IRS. However, if you're insolvent, meaning you owe more than you own, you may not have to pay income taxes on forgiven debt. 

The IRS has a worksheet you can use to figure out whether you’re insolvent. You might want to discuss your specific situation with a qualified tax professional. 

Achieve is not a Credit Repair Organization and does not provide or offer services or advice to repair, modify, or improve your credit.

Comparing credit card debt forgiveness options

DIY debt negotiation

When to consider: You have the time, patience, and confidence to deal with a lot of details and a lengthy process.

What to expect: You'll spend a lot of time on the phone and may need to be persistent. 

Professional debt relief 

When to consider: You have a large amount of debt, are struggling to make minimum payments, and need help with possible debt solutions. You don’t qualify for Chapter 7 bankruptcy, and you don’t want to file Chapter 13.

On average, people enroll about $25,000 in a debt relief program, across eight to 10 different creditors.

What to expect: Debt experts will review your financial situation, create a personalized plan, and negotiate with creditors on your behalf to resolve your debt for less than you owe.

A debt relief program could take 24 to 48 months. It depends on how much debt you enroll and what monthly program payment you can afford. 

A reputable debt relief company will offer a guarantee that the total cost to settle your debts (including fees), won't exceed your enrolled debts. Very few people (3% to 5%) who use debt relief go through the program a second time. 

Chapter 7 bankruptcy

When to consider: Your income is low enough to qualify and you're willing to let the courts sell all your eligible assets. 

What to expect: Someone appointed by the court (a trustee) will collect and sell your assets that Chapter 7 bankruptcy doesn't allow you to keep. The trustee uses the money to pay back your creditors.

Chapter 7 bankruptcy takes an average of four months from the time you file to the time your eligible debts are wiped clean. There’s a high success rate, so if you qualify for Chapter 7 bankruptcy, this may be your best option.

Chapter 13 bankruptcy

When to consider: You don't qualify for Chapter 7 bankruptcy or you prefer not to have to sell your assets. You want legal protection from creditors while you reorganize your finances and get caught up. This is a way to save your home from foreclosure if you can afford to get back on track with your mortgage.

What to expect: The court will set a three- or five-year payment plan based on your financial situation. A trustee collects the monthly payments and disburses them to your creditors. You can keep your assets.

Over half of Chapter 13 cases fail. More than half of filers find that attorney and court fees are greater than the amount of debt discharged through the bankruptcy process. In other words, they spend more in Chapter 13 than they would have spent simply paying off the debt. Many people end up filing for Chapter 13 again. 

If you're considering Chapter 13 bankruptcy, debt relief may be a better option, unless you're confident you can successfully make it through the Chapter 13 payment plan and your payment plan only requires you to pay a portion of the debt you owe.

The option you choose should depend on whether you feel up to the task of negotiating credit card forgiveness yourself, how much debt you have, and whether your financial circumstances are likely to change. Also consider the assets you have and how quickly you're hoping to move forward from your current financial situation.