Is Debt Forgiveness a Possibility? It Depends.

debt-forgivenessEven if you can get your debt forgiven, it might come with a huge tax bill and further damage to your credit score.

Debt can affect your life in all manner of negative ways. For one thing, it can bring down your credit score, which will impact your access to personal loans, and might even prevent you from renting an apartment. If you don’t pay off your debts, you can also risk having a lien put on your property, which is the first step towards having it seized by a lender.

Hopefully, you’re doing your best to never take on debt that you won’t be able to pay. But all sorts of unexpected life events can happen. Plus, there are other debts like mortgages or student loans that you might take out with the hope of a greater return later in life. And you can never be perfectly certain how decades of your life will play out.

Sometimes it would be nice if those debts could just disappear. But that’s not possible, is it? Is it?

Yes, it’s possible that your debt could be forgiven. 

You might end up in a situation where a lender forgives your debt, which means that they write off what you owe them without any expectation that you’ll pay the money back. Unfortunately, it’s unlikely to just be a totally clean slate as though that debt never existed.

“Any creditor could choose to forgive their debt,” explained Damon Duncan (@Damon_Duncan), an attorney with Duncan Law (@DuncanLaw). “However, debts are most commonly forgiven by creditors that hold debts related to credit cards or unsecured personal loans. It’s important to remember, though, if a debt of more than $600 is forgiven then you will likely be taxed on that forgiven debt as gross income. You will receive a 1099 for the forgiven debt and will be required to pay taxes as if it were income.”

And Duncan wasn’t the only one who warned us to keep an eye on the tax aspect of debt forgiveness.

“Debt forgiveness from a creditor should be used with caution,” Attorney Marie Martin told us. “Forgiven debt can be considered income for tax purposes, just like income from a paycheck. Businesses report it to the IRS, and it must be accounted for when filing tax returns. A wise negotiator would consult with a tax professional to avoid any surprises at tax time.”

Any debtor could theoretically forgive any debt. But outside of friends and family who might realize you’re going through a hard time and tell you not to worry about that $50 they lent you, which debts are actually likely to be forgiven? And can you take steps to make debt forgiveness more likely?

Some types of debt are more likely to be forgiven than others. 

It might seem obvious, but debt forgiveness heavily depends on the kind of debt is being considered. Certain debts have additional regulations attached to them that make forgiveness much less likely. A few examples would be student loans, alimony debt, and tax debt. Not even declaring bankruptcy will eliminate those debts.

But there are still ways to work within some of those more regulated debts, as certified financial educator Maggie Germano (@MaggieGermano) outlined regarding student loan debt:

“Student loan debt forgiveness can be an amazing thing, and is a way for people to not be saddled with debt for their entire lives. Unfortunately, you have to be in the right repayment plan, making the right qualifying payments for 10 years, or else you won’t be eligible. Make sure that you talk to your loan provider and set yourself up to make qualifying payments from the start. You don’t want to be one of the people who think their loans will be forgiven but then they’re not.”

As was mentioned earlier, debt forgiveness is much more common with unsecured personal loans and credit cards. That’s because lenders don’t have many avenues if you can’t repay beyond sending you to collections–at which point they’re writing off the loan as a loss anyway.

When it comes to secured loans like auto loans and home mortgages, the lender doesn’t need to forgive the debt. These loans come with collateral attached, which protects lenders from losing if the borrower can’t repay. If you can’t repay the loan, they’ll simply seize the collateral—repossessing your car or foreclosing on your home. It sucks, but it’s what you signed up for when you took the loan out.

Regardless of the kind of debt forgiveness you’re pursuing, you’re going to want to be prepared.

When in doubt, you should try talking to your creditors.

Most lenders would rather get something back for their loan than torment you for free. That means that, if you really don’t have the money to pay off your debts, your creditor might be open to working with you.

“The most common way to have some or all of your debt forgiven is by communicating with the creditor,” advised Duncan. “If they see you have no real ability to repay (and no future ability to pay) the debt and you don’t have any assets for them to attach liens to they will be much more likely to try to take advantage of tax laws and forgive the debt so they can count it as a loss on their taxes.”

Debt forgiveness: it can happen for you, but it’s not something you should be relying on. And even if you do have some of your personal debt forgiven your credit score will likely still suffer. But always do your research and always try to communicate with your lenders and you could come out ahead.

To learn more about dealing with debt, check out these related posts and articles from OppLoans:

Have you ever had a debt forgiven? We want to hear from you! You can email us or you can find us on Facebook and Twitter.

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Damon DuncanDamon Duncan (@Damon_Duncan) (@DuncanLaw), is an attorney on the North Carolina Bar Association and Foundation’s Board of Governors, a member of the Elon University School of Law’s Alumni Council, the Secretary of the North Carolina Bar Association’s Bankruptcy Section and adjunct professor at Elon University School of Law and Guilford Technical Community College.
Maggie GermanoMaggie Germano (@MaggieGermano) is a Certified Financial Education Instructor and financial coach for women. Her mission is to give women the support and tools that they need to take control of their money, break the taboo of discussing debt and income, and achieve their goals and dreams. She does this through one-on-one financial coaching, monthly Money Circle gatherings, her weekly Money Monday newsletter, and speaking engagements. To learn more, or to schedule a free discovery call, visit
Marie MartinMarie Martin is a consumer bankruptcy attorney who has been practicing for 20 years. She is a member of the National Association of Consumer Bankruptcy Attorneys, the American Bankruptcy Institute, and the incoming Chair of the Consumer Subcommittee of the Bankruptcy Section of the Minnesota State Bar Association.

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