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What You Need to Know about Debt Forgiveness

FYL 9.8.16

Debt forgiveness, either through a government program or an agreement with a

creditor, is a valid way to get out of debt and reduce your overall financial burdens.

But it’s not all up side; there are some less-than- positive aspects of debt forgiveness

that you need to consider before moving forward.

1. Debt forgiveness can be taxed: When a credit card company or other lender

forgives a debt or a portion of a debt after accepting a partial payment for you, the

amount of the forgiven debt is considered a gain. That gain is often taxable. The

lender will issue a 1099 form to you at the end of the year and your tax advisor can

help you determine whether it happens to be tax exempt or not.

2. Debt forgiveness won’t necessarily fix your credit: While the forgiven debt no

longer shows as something you owe on your credit report, the late payments that

led to you needing the debt forgiven will still show. Those late payments can

definitely hurt your credit rating, even as the removed debt helps it. Additionally,

some lenders will report that the full balance was not paid, since it technically

wasn’t, which can also work against you when future creditors are reviewing your

credit report.

3. You may not qualify for some debt forgiveness programs: While some debt

forgiveness programs can be arranged through the lender or through bankruptcy

proceedings, others are managed by government organizations and are only

available to those who meet specified qualifications. This includes programs such as

the student loan debt forgiveness program. It can be disappointing to count on a

program to erase your debt only to find out that you don’t qualify, so research

whether you qualify before counting on this as a solution.

Debt forgiveness can be a valid part of an overall strategy to reduce debt and gain

more financial freedom. But it’s not without its pitfalls, so make sure to explore all

the pros and cons before working it in as part of your financial plan.

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