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How Does Debt Forgiveness Work and Do You Qualify?

by Davis Porter

With the US consumer debt currently at an all-time record of $14.3 trillion, you could say Americans have been learning poor debt management skills from none other than the federal government itself – which has so far accumulated public debt of more than $26.95 trillion

It’s a crisis in every sense of the word. And, as if that’s not bad enough already, the situation is reportedly getting worse. American households seemingly have a thing for shopping with credit cards, buying homes through mortgages, taking student loans for tertiary education, and accumulating all sorts of tax debt. 

Now, all these forms of debt could potentially pile up fairly quickly, making it difficult for households to keep up with their repayment schedule. Thankfully, however, it appears some lenders might be willing to give you reprieve through debt forgiveness programs. 

But, make no mistake about it. The whole process is not as simple as just asking nicely. Debt forgiveness doesn’t come that easy. There are certain conditions you have to meet to qualify for one. Plus, even if you somehow manage to sail through the application process, expect your debt forgiveness program to be accompanied by stringent caveats. 

Let’s explore how debt forgiveness works, and how you can qualify for various programs- including credit card debt forgiveness, student loan debt forgiveness, and tax debt forgiveness. 

What Is Debt Forgiveness? 

The concept of debt forgiveness is as simple as it sounds. Your lender or creditor essentially clears a part of your debt or your entire balance. That means you end up paying either a portion of the pending amount or nothing at all. It all depends on the terms of your debt forgiveness agreement. 

Don’t let it knock your socks off, though. While debt forgiveness might sound like a favorable outcome when you’re knee-deep in debt, it does come with its fair share of pitfalls. 

Your lender could force you to file for bankruptcy in order to qualify for debt forgiveness. And even if they somehow cancel the debt and let you off scot-free, you won’t be walking away with a completely clean slate. 

It just so happens that Uncle Sam considers canceled debt to be part of your taxable income. So, you’ll be required to report the amount along with your regular income.

What debt forgiveness won’t affect, though, is your credit score. Apart from having your debt erased, you’ll be retaining an intact credit rating. That means you could go ahead and apply for additional loans in the future. 

Speaking of which, don’t make the mistake of confusing debt forgiveness with debt settlement. While the former is all about loan cancellation, the latter seeks to negotiate the repayment amount. So, with debt settlement, you could end up paying much less than the initial loan amount. 

Unfortunately, the kicker is, debt settlement doesn’t give you the credit score benefits you get from debt forgiveness. Instead, it hands you a negativing rating, thereby limiting your future prospects. 

How To Qualify / Apply For Debt Forgiveness

Debt forgiveness conditions don’t apply evenly across the board. Rather, your cancellation terms depend on the lender you’re dealing with, as well as the type of debt in question. 

Currently, the three most prevalent programs here are: 

  • Credit Card Debt Forgiveness
  • Student Loan Debt Forgiveness
  • Tax Debt Forgiveness

Credit Card Debt Forgiveness

While some credit card companies might be willing to cancel your credit card debt after years of non-payment, credit card debt forgiveness is an extremely rare phenomenon. The reason is, creditors only consider erasing card debts in the event of bankruptcy or death.  

Normally, card issuers relentlessly pursue unpaid debts through litigation, loan collection agencies, and debt settlement programs. It’s only after you’ve filed for Chapter 7 or Chapter 13 bankruptcy that they’ll halt all their efforts, and proceed to legally erase the loan from their books. 

All things considered, therefore, credit card debt forgiveness is only an option for debtors who accrue massive unpaid balances on their cards. Otherwise, filing for bankruptcy could attract far worse consequences than the credit card debt itself. 

Student Loan Debt Forgiveness

Thankfully, student loan debt forgiveness is not as limiting as credit card debt forgiveness. You can qualify for the program in two primary ways: 

  • Public service employment. 
  • Paying your loan through a long-term income-content plan. 

The public service option, for example, is open to both government and non-profit workers. That includes even people who take up volunteer jobs, as well as medical practice, and military service. 

But, cancellation doesn’t just come automatically. Your debt can only be forgiven after you duly remit the first 120 repayment installments. What’s more, all these payments should be submitted while you’re still an employee of the government / non-profit organization. That translates to over 10 years of public service before you qualify for student loan debt forgiveness. 

Tax Debt Forgiveness

If you ever find yourself owing Uncle Sam lots of unpaid taxes, you could take advantage of the tax debt forgiveness program to score a favorable reprieve. 

Technically, the IRS calls it the Offer In Compromise program, or OIC in short. And, just as the name suggests, OIC  forgives a portion of the debt and proceeds to give you a fairer, well-compromised offer. 

All that comes after the IRS has keenly analyzed your financial capability, asset equity, living expenses, and income. If the numbers prove that you’re indeed experiencing financial hardship, the IRS will approve your OIC application, and then come up with a lower, more reasonable tax amount – which should sit perfectly within your means. 

Now, if you’d like a taste of that, you can try your luck by applying through the IRS website. You just need to pay an application fee of $186, and then fill out forms 433-A, 433-B, and 656- which are all part of the larger Form 656 Booklet. 

Please note, though, that the prequalification process here is usually very rigorous. Applicants are expected to meet a wide range of requirements before they are considered for tax debt forgiveness. 

Over To You

And there you have it. Three debt forgiveness programs you could pursue to save yourself from an impending debt crisis. 

And while you give it all a thought, here’s a quick word of advice – although debt forgiveness programs are always welcome, they should be your last resort. You’d be much better off preventing debt crises in the first place. Just find yourself a debt management program that fits your financial needs, and everything else will fall right into place. 

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