Most credit card issuers won’t forgive all your outstanding debt, but they will work with you on repaying with a different payment plan. They may also negotiate with you on the total amount you owe if you are severely delinquent. You can take several different approaches to reducing what you owe in credit card debt, depending on your situation. Here’s what you need to know about credit card forgiveness and how to pay down credit card debt.
Key Takeaways
- Credit card forgiveness from credit card companies is unlikely.
- You may be able to negotiate with credit card companies for other debt relief, like creating a debt management plan.
- A debt consolidation loan can help you pay down credit card debt faster.
- Debt settlement will reduce what you owe, but it can also have long-term negative impacts on your credit.
Understanding Credit Card Debt Forgiveness
Credit card forgiveness is when a credit card issuer eradicates your outstanding debt and you’re no longer obligated to make payments on that debt.
Complete credit card forgiveness from credit card companies is rare, but there are other debt relief options you can pursue, such as debt consolidation, debt management plans, or debt settlement. You might also have some forbearance options with creditors wherein you can temporarily stop making payments on your credit cards without facing additional interest charges or fees.
Negotiating With Credit Card Companies
Carrying credit card debt can hurt your finances by dragging down your debt-to-income (DTI) ratio. There are a couple ways you can work out your outstanding credit problems, depending on your circ*mstances. You can negotiate with credit card companies on your own or use a debt relief company to help you with the process.
1. Work Out a Payment Plan
You can reach out to your credit card provider and try to find a compromise that works for the both of you. This could include forbearance options, which temporarily pause your required payments to offer you some relief without hurting your credit.
2. Try a Debt Settlement Plan
You might also work out a debt settlement plan in which you pay off your debt for less than you owe and the remaining balance is dismissed, so you’re no longer responsible for it.
To do this, you’ll need to have a lump-sum amount to offer your creditor. Once your credit card issuer agrees, get the agreement in writing to make sure both sides understand the terms. Keep in mind that your lender is not obligated to settle any amount of your debt.
Creditors usually typically prefer to avoid debt settlement and instead may pass along your outstanding credit to a collections agency. However, debt settlement might be an option if you’re significantly past due on your debt, as a lender may view a partial loss as better than a total loss.
Consequences of Debt Settlement
Debt settlement can help you reduce the amount you owe, but there are downsides to consider, whether you hire a firm to handle it on your behalf or do so yourself. First, when you settle debt, any forgiven amount is considered taxable income. This means you’ll pay taxes on the amount of debt you didn’t repay.
Many for-profit debt settlement companies require you to stop making payments as you’re going through debt settlement so you can put that money toward saving for the lump-sum payment. This strategy can cause significant harm to your credit score. Payment history is the biggest determining factor in your FICO score, so missing payments can lower your score.
You also pay a debt settlement company to negotiate your credit card debt on your behalf even before any debt is settled. A percentage of your debt goes to this company each month, and your debt could increase even more.
Alternatives to Debt Forgiveness
While debt forgiveness is one way to eliminate your debt, it’s rare. In addition to a debt settlement plan, other options to get out of debt can include debt consolidation, working with a credit counselor on a debt management plan, and filing for bankruptcy.
Debt Consolidation
Debt consolidation is when you take out a loan or line of credit to pay off your outstanding debt, which has the benefit of reducing multiple monthly payments down to just one. Debt consolidation usually means getting a newer, lower interest rate than what you’re currently paying to lessen what you owe each month.
Consult With a Credit Counselor
A nonprofit credit counselor can help you create a debt payoff or debt management plan. These plans are tailored for you and may cost you very little or nothing.Credit counseling is more than just advising you on debt. A counselor can also teach you about budgeting, in addition to creating a money management program based on your income and needs.
Rather than settle debt, credit counselors may renegotiate a different repayment plan with creditors.
Bankruptcy
Bankruptcy is considered an option of last resort. Some or all of your outstanding debt can be forgiven through bankruptcy, but it can have severe consequences on your credit. You can file for either Chapter 7 or Chapter 13 bankruptcy, depending on your circ*mstances. While Chapter 7, or “liquidation bankruptcy,” is usually faster, your assets are sold off to repay your debts, which can include your house. If you don’t own any property, this is usually the better option.
Chapter 13 is the “reorganization bankruptcy” that helps you create a payment plan, usually taking three to five years to complete. With this filing, your assets are protected, so you won’t lose your home in the process.
Bankruptcies can stay on your credit report for seven to 10 years, depending on how you file. Because of this, bankruptcies can hurt your chances of borrowing in the future, meaning you'd be less likely to get approved for other credit cards, home loans, auto loans, or other types of credit. So consider other debt repayment options before you file for bankruptcy.
Can Credit Card Companies Forgive All Debt?
Most credit card companies don’t grant debt forgiveness unless you’re many years past due on your outstanding debt. Even then, you should have at least a portion of your debt ready to pay as a lump-sum amount, since most companies won’t forgive all of the debt you owe.
What Are the Consequences of Debt Settlement on Credit Scores?
Debt settlement and bankruptcies will typically stay on your credit report for seven to 10 years. This means your credit report will include that negative impact, which can hurt your chances of getting approved for loans in the future, including mortgages or auto loans.
Are There Any Tax Implications of Debt Settlement?
After debt settlement, any amount that was forgiven will be considered taxable income. The amount you owe will depend on the amount of debt forgiven and your tax bracket.
The Bottom Line
Credit card companies are unlikely to forgive your debt, but you do have some alternatives to help you reduce and eliminate your credit card debt. Consider a debt consolidation loan or working with a credit counselor on a debt management plan. You can also turn to a debt relief company to help you negotiate a debt settlement, or, as a last resort, file for bankruptcy. Weigh the pros and cons of each strategy, including their impact on your credit, to determine which one best suits your needs and financial situation.
