Is debt forgiveness a good option right now? Here’s what experts say

Falling into debt is easy. One bad month leads to a balance on the credit card, and with compounding interest working against you, it may not be long until you’ve racked up a hefty credit card balance that you can’t pay off.

If this sounds like something you’re dealing with, you’re certainly not alone. According to the Federal Reserve Bank of New York, average credit balances are up almost 6% from a year ago. American consumers now have more than $1.17 trillion in total credit card debt.

Fortunately, there are solutions for this issue. 

One is credit card debt forgiveness (also called debt settlement) — an option that could even help you settle those debts for less than you owe. But this type of debt relief may not be the right move for everyone, and it won’t be right for every situation, either. 

Find out more about your debt relief options today.

Is debt forgiveness a good option right now? Here’s what experts say

Here’s what experts have to say about this strategy and when it might work for you.

When debt forgiveness might work for you

Debt forgiveness is when a creditor — a lender, credit card issuer, etc. — agrees to cancel a portion of (or with some types of debts, all of) an outstanding debt you have with them. It’s more common with certain types of debts, like federal student loans, for example.

“These are often forgiven through government programs or for people working in public service,” says Nate Towers, director at Five Pathways Financial. “You can get a big chunk of your student loans wiped out if you qualify.”

You also may be able to get medical bills forgiven or reduced, especially if you’re facing financial hardship, and there’s tax debt forgiveness, too (though it’s technically called an “offer in compromise,” Towers says.)

Finally, credit card issuers will sometimes forgive a portion of your balance, but typically only in certain circumstances.

“Creditors are generally reluctant to forgive debts, as it results in financial losses for them,” says Howard Dvorkin, chairman of Debt.com. “However, in situations where the debtor demonstrates significant financial hardship and the likelihood of full repayment is low, creditors might consider forgiveness as a viable option.”

Take steps to tackle your expensive debt now.

The downsides to debt forgiveness 

Debt forgiveness may sound ideal, but as Dvorkin puts it, “There’s no such thing as a free lunch. Eventually, you pay a price.”

The main price? That comes in the form of extra taxes.

“When a company decides to forgive debt, they will write that off as a loss and take a tax deduction,” says Eric Elkins, CEO at Double E Financial. “Well, the IRS lost tax revenue, so they try to make up for that loss by applying the amount of debt forgiveness and add that as taxable income to you.”

In short: It means a higher tax bill next April.  

On top of this added tax burden, debt forgiveness can also hurt your credit, which can make it harder to get a loan or apply for credit in the future. It’s also just a “time-consuming and challenging process,” Elkins says.

“If an entity is potentially willing to forgive your debt, then they are going to make you work for it,” Elkins says. “Prepare to meet high eligibility requirements. Be ready to prove you are struggling financially. Prepare to fill out numerous forms and applications.”

The bottom line

If you’re deep into debt, debt forgiveness isn’t your only debt relief option. You can also explore debt consolidation, which is when you use a single loan or card to pay off all your debts, essentially rolling them into one lower-rate balance. 

Balance transfer cards that come with promotional 0% rates can be a good tool for this, but “Just be careful not to fall into the trap of using that new credit for more spending after you consolidate,” Towers says. 

You can also work with a financial advisor or debt relief company to help you get out of debt or, in many cases, work something out with your creditors directly. 

“Contact your creditors and try and negotiate a better deal for yourself,” Elkins says. “The worst thing they can say is no.”