What is Debt Forgiveness and How Does It Work?

Posted on January 14, 2021 in Debt

You might have heard of the phrase “debt forgiveness” before, but what exactly does it mean? It sounds like an easy answer to a stressful problem, but there can be a catch. You should always be aware of people promising things that sound too good to be true (because they usually are).

However, there are legitimate ways to go about managing your debts. Having your debts forgiven depends on a number of different factors, such as the type of debt you already have and the type of forgiveness option being offered. Here we’ll discuss some of the most common types of debt and the available debt forgiveness strategies.

Common Types of Debt Forgiveness:

Credit Card Debt Forgiveness

It’s incredibly easy to fall into the trap of credit card debt, which is why so many Americans do. Using that small piece of plastic to get just what you want when you want it is tempting and readily available.

Many people have become victims of predatory credit card company practices. They rack up the debt, then they rack up the interest on that debt, and soon they’re faced with a bill they just can’t afford.

There are ways to reduce credit card debit and break free of the monthly payment cycle. Both bankruptcy and debt settlement can reduce or eliminate it; however, there’s one serious consequence. Your credit score will suffer if you choose to go either of these routes.

On the other hand, debt management is a tool you can use to reduce your credit card debt. By going through debt management, you can reduce your interest rates and have a less significant impact on your credit score. We discuss strategies for debt forgiveness and management below.

Mortgage Debt Forgiveness

When you sign the paperwork to invest in a home, you make a major financial commitment. Then, if you lose your job, you’re still on the hook for the mortgage.

The best idea is to check for refinancing options before doing anything else. If that’s not possible, then your home might be foreclosed. After foreclosure, mortgage lenders can try to collect money from displaced homeowners, but they are typically unsuccessful.

After the homeowner can no longer pay the mortgage and the home goes to foreclosure, the homeowner usually is not on the hook for the taxes on the home. However, the mortgage lander can cancel a remaining “deficiency balance,” which means the individual most now pay taxes on the mortgage.

A foreclosure has a major impact on your credit score. Before you can get mortgage debt forgiveness options, you will have to lose your home and suffer that damage to your credit score.

Student Loan Debt Forgiveness

When American high school students decide on their college, they know that student loans are available to help them pay the tuition bills. However, many high school students (and adults who go back to college) sign up for loans with private lending companies that are predatory and charge high interest rates.

Student loan forgiveness is possible, if you’ve borrowed federal student loans (and sometimes private loans), through specific programs. If you work in public service or in education, you can have your loans forgiven after you meet a number of criteria (which typically involves working in a high-need low-income area). Similarly, volunteer programs and the military also offer loan forgiveness in some cases.

However, many people did not borrow loans just from the government and many people are also not working in those fields.

If that’s you, then you can look at refinancing your loans, seeing if your employer will help with them, or determine if your monthly loan payment can be cancelled because the college closed. In all of these cases, you will still have to pay taxes on the amount of debt that’s forgiven.

Debt Forgiveness Strategies:

Debt Settlement

It’s possible to reach a debt settlement agreement with the lender. You present your case of how much you can afford to repay, either immediately or in installments, and the remaining debt is forgiven. This is a great solution, but remember, you will still have to pay taxes on the whole amount of the debt. If you’re interested in an effective settlement option, companies similar to TurboDebt can offer debt relief and consulting options that may be able to help.

Debt Consolidation

Consolidating your debt is a great tool to use. By combining multiple loans or debts into one, you might be able to negotiate a lower interest rate. However, often times the repayment term is longer, so you might end up paying more interest in the end. Still, it will offer some relief in the short term.

Debt Validation

If you think that you have a debt you don’t truly owe, you have a right to force the debt collector to prove you owe the money. The Fair Debt Collection Practices Act guarantees this right. You have to send a written request to the debt collector within the first 30 days that the collection agency contacts you. If the debt is proven invalid, then the collector cannot legally continue to pursue the debt.


Bankruptcy is a term for a court procedure that helps people get rid of their debts and repay their creditors.  You might have heard that bankruptcy is the worst thing ever for your credit score. That might be true in the short-term, but in the long-term, it can help. When debt is discharged in bankruptcy court, your scores can improve.

There are two common types of bankruptcy for individuals: Chapter 7 and Chapter 13, and studies have shown that individuals who have filed both types of bankruptcy see their scores rise in the next year. Bankruptcy might be a better option than you think – don’t be afraid to leverage it as a tool to get out of debt fast and start rebuilding your savings account.

Get Debt Forgiven Today

If you’re struggling to repay your debts, then it might be worth it to look into a debt management or forgiveness option. Taking control of your debt now is the first step towards achieving debt relief, which will open up your finances so that you can begin building up a path towards wealth. Remember, being debt free can be worth damaging your credit score in the short term if it means achieving your long term financial goals. Take advantage of one of the options above today!

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