It sounds like a debt forgiveness program almost sounds too good to be true for anyone in debt. Partially or entirely wiping out your debt is a very attractive option.
Can it get easier?
Let’s go into the details of the various types of debt forgiveness programs and find out whether they live up to publicity.
What Exactly is Debt Forgiveness?
Debt forgiveness, which occurs when a lender or institution cancels your debt, in whole or in part, and you are no longer required to repay it, can happen for all types of debt: student loans, credit card debt, medical bills-you name it.
But here’s the thing: debt forgiveness isn’t free.
There may often be strings attached, such as eligibility requirements, possible tax consequences, and potential hits to your credit score.
Types of Different Debt Forgiveness Programs
Before diving head-first into a debt forgiveness program, you need to know what you are getting yourself into.
Not all debt is forgiven in the very same manner, and different programs have different rules.
Student Loan Forgiveness
Student loan debt is one of the most typical kinds of forgiven debts amongst people in public service or certain careers.
- Public Service Loan Forgiveness (PSLF): If you are working for a qualifying employer (the government or a nonprofit), making 120 qualifying payments will forgive your remaining balance. That’s great if you fall into the low-paid-but-important jobs, such as teaching or healthcare. It does take 10 years of payments, and missing even one may result in it not counting.
- Income-Driven Repayment Plans: If you are on an income-driven repayment plan, your loans could be forgiven after 20 or 25 years. That sounds nice, but that is a long period of time to carry the weight of debt, and during that period, interest can add up significantly.
But here’s a downside many people don’t know about: forgiven student loans can sometimes be considered taxable income.
That means after 20 or 25 years, you might owe the IRS a big chunk of money just when you thought you were free from debt.
Credit Card Debt Forgiveness
Credit card debt is harder to get forgiven, but it’s possible. Debt settlement companies often negotiate with creditors to reduce the amount you owe.
They may agree to accept a lump-sum payment that’s less than your total balance.
But unlike the quick promises of a “one click trader” in financial markets, debt settlement is far from instant and can take months or even years to resolve.
But there are risks.
Stopping payments to creditors while negotiating can wreck your credit score, and there’s no guarantee they’ll agree to settle.
Additionally, any debt forgiven through a settlement can also be taxable.
Medical Debt Forgiveness
For those buried under medical bills, some nonprofit hospitals offer debt forgiveness. Many are legally required to provide assistance to low-income patients.
But qualifying for this forgiveness often requires lots of paperwork and proof of financial hardship.
The good news is that medical debt has less impact on your credit than other types of debt.
Recently, credit bureaus stopped counting medical debt under $500, and paid medical debt no longer shows up on credit reports.
Pros and Cons of Debt Forgiveness
Debt forgiveness is a very good thing on paper, but it does come with its pros and cons.
Pros
- Relief from overwhelming debt: You no longer have to worry about some or all of your debt.
- You can avoid bankruptcy: Forgiveness programs can save you from filing bankruptcy, which has consequences on your credit for many years.
- Smaller monthly payments: In some instances, such as with income-driven repayment plans, the amount you pay on a monthly basis may get very manageable.
Cons
- Credit score damage: The credit score may suffer because of the debt settlement type of program, which requires you to stop paying anything while negotiations are going on.
- Tax consequences: The IRS considers debt forgiveness an income; you may end up owing quite a bit in taxes.
- No guarantees: Creditors are under no obligation to discharge any of your debt, and debt-relief firms charge you whether or not they obtain satisfactory negotiations.
Should You Pursue Debt Forgiveness?
Whether debt forgiveness is right for you depends on your situation. If you work in a low-paying job in public service, then student loan forgiveness can be a godsend.
Others may find the tax consequences and very long timelines less appealing.
Similarly, credit card debt forgiveness through settlement can work for some people, but the risks to your credit and the uncertainty of negotiations can outweigh the benefits.
Tip: Before entering any debt forgiveness program, weigh your options.
Consider alternatives like debt consolidation or even a do-it-yourself approach where you negotiate directly with your creditors.
Know what you are signing up for if you decide to go ahead with forgiveness. Always read the fine print.
Conclusion
Well-intentioned as it may be, debt forgiveness is no magic bullet that helps everyone.
It comes with some risks, and sometimes, the long-term consequences that are maybe a lower credit score or unexpected taxes may turn out less attractive compared to how they may seem.
My take is that you need to do your homework. Always know what you are getting yourself into and, in any case, be prepared for the shocks that may come afterward.
It is also important to remember that, where forgiveness may be required or needed as a kind of release unto itself, nothing in this life comes without some price being paid, however free it may sound.