Seeking Forgiveness for Credit Card Debt

When tormented by the burdens of excessive debt, many of us may despair that we will never be able to repay our creditors in full. Shuddering at the prospect of never being able to clear our names, we look for a way to compromise, perhaps through partial repayment or debt forgiveness. Yet what such concepts truly involve is often misunderstood and it is important to know the circumstances under which debt is “forgiven”, what that process entails and the consequences for your financial standing.

Unfortunately, as one might have expected, credit card companies are extremely reluctant to agree to any form of debt forgiveness and many may refuse outright to negotiate with you. They have no incentive to accept less than the total amount owed if they believe they can still extract payment from you, even by unpleasant means such as the use of debt collectors. If you have demonstrated that you are capable of making payments you are very unlikely to convince your credit card company that your case merits debt forgiveness. Credit card providers are generally more willing to consider debt forgiveness in the case of an individual who has consistently fallen behind on multiple payments and is unable to make even minimum payments when due. Companies recognize that these people will probably remain unable to repay and will cause damage to the company’s earnings. In order to prevent such an outcome, they may consent to a partial reduction of your debt, whereby you agree to pay part of what you owe in exchange for forgiveness of the remainder and acknowledgement of your acceptance of debt forgiveness on your credit report. Similarly, those who file for bankruptcy as a means of blocking current debt collection also suffer critical damage to their credit score, which could drop by up to 130 points. Bear in mind that this will impact your ability to get credit in the future.

Navigating the process of debt forgiveness remains tricky even after your creditors have agreed to work towards a settlement. Beware of professional agencies that offer services in handling debt settlement cases. These organizations charge high fees (either in the form of upfront charges or high interest rates) and will not provide additional support in messy encounters you may have with debt collectors. Hiring a trustworthy attorney or a good credit counselor can provide you with access to more reliable and educated professional advice. The outcome of the debt settlement depends heavily upon not just the state of your financial affairs, but your knowledge and negotiating skills. Although the most successful debtors have managed to pay less than 1/3 of their total debt, it is very likely that you will still pay the majority of what you owe. Regardless of the amount of forgiven debt, it is difficult to quantify the impact that a subsequently damaged credit report will have upon your finances.

If a settlement between you and your creditors is reached, your next step is to report the matter to the IRS. The credit card company will send you a 1009-C Form, which deals with cancellation of debt. Any amount of debt that is forgiven as part of the settlement is considered to be income and must be noted as such when you file your taxes. However, those who have declared bankruptcy do not have to acknowledge this as income on their taxes.

Credit card debt forgiveness seems by name and brief descriptions to be an option worth considering, but as with all manners of debt relief there are affiliated consequences that leave scars on financial records. It may well be that you do not qualify for debt forgiveness, but if you are able to negotiate a good settlement with your credit card company, decide first whether further damage to your credit status is justified by the potential outcome of negotiations.

Siddarth Nagaraj

Siddarth Nagaraj is a junior at the University of North Carolina-Chapel Hill. He is currently pursuing a double major in Global Studies and Political Science with a minor in Geography. Originally from Winston-Salem, North Carolina, he is interested in socioeconomic inequity and cultural diversity in developing nations. He is also a Section Editor for The Hill, UNC’s only nonpartisan political review, and has written multiple articles on international affairs for the quarterly publication.

Since the summer of 2010, he has volunteered as a Savings Officer for the Community Empowerment Fund (CEF) in Chapel Hill, which seeks to promote financial literacy and help fiscally strained individuals achieve self-sufficiency. Apart from writing, Siddarth enjoys reading, travel, and watching British television programs. Upon graduation, he plans to earn a graduate degree and seek employment in the field of international development.

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