Credit Card Debt Forgiveness

Credit Card Debt Forgiveness
Key Takeaways:
  • Credit card debt forgiveness is possible through debt settlement or bankruptcy.
  • Debt settlement means negotiating a lower payoff for your credit card debt.
  • Bankruptcy requires you to surrender assets in exchange for wiping out unsecured debt or paying into a plan over several years.

Are you having trouble making your credit card payments?

It’s a growing problem for Americans. A combination of inflation, rising interest rates, and record credit card debt is causing more and more people to fall behind on their debt payments. 

So, now is an excellent time to learn about credit card debt forgiveness. For some, it may be the only way to reduce their credit card debt balances. For others, it’s an option they should at least know exists when considering alternative approaches to paying their credit card debt.

Debt forgiveness is not a free lunch. It has consequences, including damage to your credit score. This article will help you fully understand credit card debt forgiveness so you can make the right decisions.

Topics covered by this article include:

  • Credit Card Debt Hits Record Levels

  • Rising Interest Rates Make Credit Card Debt Harder to Deal With

  • Can Credit Card Debt Forgiveness Help?

  • What Is Credit Card Debt Forgiveness?

  • Credit Card Debt Relief

  • Credit Card Debt Forgiveness Through Bankruptcy

Credit Card Debt Hits Record Levels

It’s easy to understand why more people are struggling to make the monthly payments on their credit cards these days. There’s more credit card debt than ever before.

According to the Federal Reserve, outstanding credit card debt hit a record level (over $1 trillion) in early 2022. Americans have never before owed more money on their credit cards.

Rising Interest Rates Increase Credit Card Debt Challenge

If you regularly carry a credit card balance, interest payments are probably adding to your debt.

This is always a problem because credit card interest rates are especially high – much higher than interest rates on mortgages, car loans, student loans, or personal loans. 

Lately, that high interest has been getting even higher. The Federal Reserve raised interest rates three times in the first half of 2022, including the biggest rate hike since 1994. Fed rate increases usually push credit card rates higher as well. That means your credit card balance is getting more expensive to carry. 

Higher interest rates increase your credit card’s minimum monthly payment. So, if you were already struggling to make your monthly payments, that problem may have just gotten worse. 

Can Credit Card Debt Forgiveness Help?

If this situation has made your minimum monthly payments unaffordable, it’s time to consider debt forgiveness. 

Debt forgiveness is a serious step that can harm your credit scores. However, it may be necessary if you find any of the following are true:

  • You can’t keep your credit card balance from rising

  • You’re maxed out or nearly maxed-out

  • You can rarely make more than the minimum payments 

  • You’ve had to sacrifice necessities to make your credit card payments

  • You’ve repeatedly missed monthly credit card payments

  • You’ve tried other possible solutions like debt consolidation or debt management

If you’re facing these kinds of problems, you need to look into credit card debt forgiveness.

What Is Credit Card Debt Forgiveness?

Credit card debt forgiveness means having part or all of what you owe wiped off the books. 

Unlike some other options for dealing with debt, this doesn’t simply mean finding ways to make it easier to pay what you owe. Debt forgiveness means you won’t have to pay the full amount. 

If that sounds great, first consider the consequences. If you have credit card debt forgiven, your credit scores will suffer and it may be very hard to get credit for some time. Plus, forgiven amounts are considered taxable by the IRS unless you’re insolvent. (“Insolvent” means your debts exceed your assets.)

Still, if nothing else will work, you may decide it’s worth accepting the consequences of debt forgiveness. In that case, you have two ways to go about it:

  • Debt relief

  • Bankruptcy

The next two sections will describe each of those options.

Credit Card Debt Relief

Debt relief can have several meanings, but often it means debt settlement. This means getting your creditors to accept less than you owe as payment in full. 

Why would a creditor agree to this? Well, if you can show that you can’t afford to pay everything, your creditor might prefer to take a partial payment and avoid an expensive collection process that might not work.

Also, people often have multiple debts. So, a creditor that knows you have serious financial trouble may decide it’s better to take what it can get now rather than see your money go to pay someone else.

You can either try to negotiate a debt settlement yourself or have a debt relief professional do it for you. 

In either case, there are costs. Settled accounts can stay on your credit report for up to seven years, making it very difficult to get credit. 

And because privately settled debt could be considered taxable income, you may owe the IRS.

Finally, if you use a professional debt settlement firm, it will charge a fee. That reduces the total amount that the process saves you.

You don’t get something for nothing. However, you may be able to get out from under that debt, as long as you are willing to live with the consequences.

Credit Card Debt Forgiveness Through Bankruptcy

Another way to get some or all of what you owe wiped off the books is bankruptcy. This is a legal process in which a court examines your financial circumstances and decides which debts you do or do not have to pay.

As an alternative to a private debt settlement agreement, bankruptcy has both pros and cons, as discussed below.

Advantages of bankruptcy over negotiated debt settlement:

Disadvantages of bankruptcy over negotiated debt settlement:

  • Bankruptcy is a public process, so your money problems can’t be kept private

  • With bankruptcy, you give up any say in which debts you’ll agree to pay

  • Depending on the type of bankruptcy, it can stay on your credit record for as long as ten years

  • You may have to pay a lawyer, and you will have to pay court costs and filing fees

While you don’t pay a portion of the debt forgiven to a debt relief firm under bankruptcy, there are likely to be legal costs. So, in either case, you are unlikely to actually save the full amount that is forgiven. 

Credit card debt is a serious problem. Debt settlement and bankruptcy are possible solutions with serious outcomes. 

You should consider options with less long-lasting consequences first. However, if none of these work for your situation, debt settlement or bankruptcy may be worth a closer look.

Frequently Asked Questions

Will I have to cancel my credit card if they settle my debt?

Almost certainly. Forgiving debt costs the credit card company money. They won’t want to retain a customer that costs them more than they make. Plus, it will be hard to get new credit as long as that settlement stays on your credit record. 

Can I negotiate to lower my minimum payment instead of canceling my debt?

Possibly. Through private negotiations or a debt management plan managed by a credit counselor, you may be able to get your interest rate lowered and/or your minimum payment reduced. Keep in mind, though, that minimum payments are already pretty low compared to the total amount you owe. If you are having trouble meeting your minimum payments, lowering them may only give you a limited amount of relief. 

Is it worth paying an upfront fee for debt settlement?

No. Not only isn’t it worth it, but federal law prohibits debt settlement firms from charging fees upfront. Reputable debt relief companies only charge a fee when you reach a debt settlement agreement.