Approaches To Debt Forgiveness

In the extremely fast and often cruel world of personal finance, sometimes there’s just no winning. No matter how hard an individual may try sometimes their debt is just too much to bear. 

In the sea of debt they go from floating on the water to fighting for air, but ultimately sink down to the bottom. There is no shame in this as it has happened to millions if not billions of individuals over the course of human history. 

Sometimes the only way to get out from underneath the crashing waves is to admit defeat and ask for debt forgiveness. Now, that can be easier said than done, but here are a few approaches to help get you back above-water.

What Exactly is Debt Forgiveness?

Debt forgiveness means exactly what it sounds like. A lender forgives some, or potentially all, of a debt that’s owed on a loan or credit account. 

Unfortunately, debt forgiveness is often not that simple and can be a relatively complicated process. Sometimes debt forgiveness can come with an assortment of difficult to follow rules that come with severe penalties, unexpected tax implications, and massive damage to a credit report. 

For example, debts that are forgiven are often then labeled as income on an individual’s taxes. The money that they borrowed and did not pay back would be taxed as though it were income, and that number could be quite substantial and create a new host of problems with the IRS. 

Also depending on the details of the forgiveness it may be reported to the credit bureaus and, depending on how it’s reported, might cause significant damage to the borrower’s score. The debt may be erased but that damage could take years to repair. 

In the end it’s very important to thoroughly research the terms of any potential debt forgiveness offer that’s received before agreeing to it. 

Varying Types of Debts and Options Other Than Forgiveness

Depending on the type of debt, loan, or credit account there are different options and programs available in order to achieve debt forgiveness. The most common types of debt include student loans, credit cards and mortgages. 

Below is a list of what type of debt and options in how to achieve forgiveness or potentially other ways to pay them off.

Student Loan Debts

Considering the explosion of college costs and the often highly predatory nature of student loans, it’s safe to say that student loan debt can be some of the most challenging to repay. Adding on to these very large issues is the fact that student loan debt is very rarely dischargeable even in the events of bankruptcy. However, there are options available to anyone looking to eliminate their student loans. 

Forgiveness: Depending on the nature of the loans there can be a few separate ways to eliminate student loans. Anyone employed by a governmental or non profit organization may be eligible for the Public Service Loan Forgiveness Program. The same is true for teachers with five full time complete and consecutive years in a low-income elementary school, secondary school or educational service agency. Although rare, student loans have also been forgiven in the event of a bankruptcy, but that requires very specific eligibility requirements to be met. These are but a few of the options available for forgiveness, but ultimately, contacting the loan servicer and discussing the details of your situation would be the easiest method toward forgiveness. 

Consolidation: In the case of federal student loan debt, the option of a direct consolidation loan may be available. This loan would allow the borrower to combine multiple federal student loans into one, which would create a singular payment and give the borrower the option of paying lower monthly installments for a longer rate and from a variable interest to a fixed one. This option is not forgiveness and could potentially lead to paying more interest depending on the details selected.

Income-Based Options: Depending on the specific details in a borrower’s life and circumstances they may qualify for a large reduction or complete erasure of their student loan debt. The United States Department of Education considers factors such as income and family size, and will determine how much they believe an individual could reasonably afford to pay back. However, there are a few potential drawbacks. Like with consolidation, this option can lead to lower payments but made over a longer period of time. The interest accumulated over that time could end up being substantial and may end up being more expensive than what the loan would have been without seeking this assistance. Also for any debt forgiven it will be classified as income and would be taxed accordingly. So, although the debt would be forgiven there would still be money needed to pay the corresponding taxes as a result.

Credit Card Debt

Credit cards are one of the most popular ways to cover unexpected expenses, especially those with a high dollar amount. Why use cash for a several hundred dollar refrigerator when you can just swipe the plastic? As a result, credit card debt is an extremely common problem amongst adults today and can quickly get out of hand if not managed properly. Even those utilizing cards for their occupation can fall victim to credit card debt. For example, there are many great credit cards for teachers, yet if not used properly the risks can heavily outweigh the benefits and rewards.

Forgiveness: In the case of credit card debt, it’s what’s classified as an unsecured loan. This means there is nothing offered as collateral. This can be a great bargaining tool to anyone looking for debt forgiveness. To put it simply, a credit card lender would love to have the entire debt repaid but will gladly settle for some of the debt paid as opposed to none of it. When a debt is not being paid, most lenders sell the debt to collection agencies, and most often, for pennies on the dollar. A potential compromise would be to offer to pay more than what they could sell debt for but less than the total amount.

Debt Management: This option requires bringing in a third party in the form of a credit counseling agency. They work as the middle man between the borrower and the lender, setting up a debt management plan that often benefits both parties on either side. The borrower would pay the agency the agreed upon monthly payments, and from there the agency would pay the lender. Oftentimes they are able to negotiate better interest rates, lower monthly payments or other things to help the lender make their payments easier. Most agencies do come with a fee though, and there can be restrictions placed on using or opening credit accounts that can potentially harm a lender’s credit score depending on the manner that they report to the credit bureaus.

Mortgage Debt

When it comes to home ownership there are many more people affected than just the individual owners of the home. 

When a home is foreclosed upon it can have a devastating ripple effect on the homeowners in the surrounding area and on the nation’s economic stability in the form of the housing market. 

As a result there are options available to help mitigate the number of foreclosures for the benefit of everyone and not just the homeowner. There are quite a few options with too many details to cover but anyone interested would do well to contact the Federal Housing Administration (FHA) at 1-800-225-5342 where they can get details specific to their situation.

Bankruptcy

Sometimes no matter how hard a lender tries and how many options they exhaust they still aren’t able to get out from under and must declare bankruptcy. Depending on the bankruptcy filed for there can be a wide ranging variety of consequences, so this option should truly only be used at the very last one. 

For example Chapter 7 bankruptcy can require that an individual’s assets are liquidated and used to pay the creditors owed. In a Chapter 13 bankruptcy the individual may be able to keep their physical property, but would be required to pay a monthly payment toward the debt owed for a period of years after which the debt would be discharged. 

Although these penalties can be steep sometimes, this option is the only way to break free from the debt.

The Takeaway: Debt forgiveness is available in many forms for different types of loans and debts. Although not always easy to achieve, it can be possible to eliminate debt once and for all.

Forgiving debt can come with all kinds of unexpected problems and may take many tries to achieve. Ultimately if debt forgiveness is not an option there are still ways to make payments easier to manage. 

The goal is to avoid declaring bankruptcy at all costs, but sometimes that can be the only option left. At the end of the day there are many options available to forgive, reduce or just make a debt more manageable.