In good times and bad, some people need credit card debt forgiveness. It is possible to get, but there are complications and tricks in the process that anyone after this kind of debt relief needs to know.
Who receives forgiveness?
As the old adage goes: “to err is human but to forgive is divine.” However, lenders and credit card companies are not in the business to be divine. What they do specialize in is analyzing risk. They want to be able to collect on all the money they have lent out. However, they are also aware that some people may not be able to pay at all unless they are given some kind of a break and have part of their debt forgiven. Therefore, they are willing to cut deals with people who appear to be in over their heads.
This can make it tough for those who have fallen on sudden hard luck and want some quick relief before they start falling behind. Since the lender has to be convinced the borrower will be unable to pay, they will likely be skeptical of the calls for relief for those who have always paid their bills on time to that point. Therefore, it is necessary to be able to prove the financial difficulties to the lender.
How much credit card debt forgiveness can be expected?
The amount of debt forgiveness that may be granted will depend on the condition of the borrower, policies of the lender and other factors. In a typical settlement, the borrower is required to repay 30-70% of the money owed. For borrowers who enter negotiations, it is unlikely they will be asked to pay a much higher percentage since the average lender will not go into negotiations in the first place if they think the borrower is capable of paying a high percentage.
In less-severe cases, deals can be worked out in which interest rates are cut and punitive fees eliminated to allow the borrowers to get back on their feet. While deals like this can negatively impact a credit score depending on the way they are reported, they have fewer potential downsides that having debt totally forgiven.
Credit card debt forgiveness is not an easy road. There is lost time, possible fees, negative impact on one’s credit score and tax considerations that need to be taken into account. Therefore, it should only be undertaken after other options are exhausted. For those who have no other choice, there are some things to keep in mind when they try negotiations:
- Lower level customer service reps are not likely to have any authority to make any kinds of deals, and it will be necessary to take to management.
- The lender will need to be convinced that the borrower simply will be unable to pay under the current conditions. Either they cut some kind of a deal or the borrower will not be able to service the debts at all, even though they would like to.
- Everything will need to be clearly spelled out in writing.
Debt management programs and companies
For those unable or unwilling to negotiate with creditors directly, debt consolidation with the help of third parties may be the best option.
A debt consolidation loan is like refinancing. When it is done properly, it can combine many debts into a single more manageable one at lower interest rates. However, those using these services need to ensure that they really will be paying less in the long run, and that they combine the loan with a plan to reduce spending while avoiding any new debt.
In addition, to get the best loans, it will be necessary to put up collateral such as a house. The downside of this is that the home could be lost of the loan is not repaid.
With debt reduction services, debt management companies and others will work on behalf of the debtor to have debts, including credit card debt, at least partially forgiven and reduce fees and interest rates. While this process resembles a debt consolidation loan in some ways, it is different in that new loans are taken out.
When using any of these services, it is important to be very wary. There are many good services out there, particularly the nonprofits, but many do not deliver what they promise and are not worth their fees. Before entering into any agreements, carefully check the reputation and accreditation of the company. In addition, note that some of those that appear to be nonprofits actually are not.
Important tax considerations
Those who have credit card debt forgiven often face unexpected problems at tax time. This is because the IRS will treat the forgiven debt as taxable income unless the person who had the debt forgiven is insolvent or in bankruptcy (claiming this exemption will require filing an IRS form 982). For example, if someone has $5,000 out of $10,000 worth of credit card debt forgiven, they will receive a 1099-C “cancellation of debt” tax notice. This money will need to be reported on line 21 of the 1040 tax form as “other income.” This forgiven debt will then be taxable at the rate that taxpayer falls under.