Financial hardship can affect anyone, and it can be stressful when credit card debts begin to pile up. But there may be options to help you manage debt. Credit card issuers sometimes work with borrowers to find solutions for unpaid debt. And, though rare, you could have your credit card debt forgiven.
Educating yourself is the first step in debt forgiveness or other debt relief. Let's start with the possibility of credit card debt forgiveness.
Debt forgiveness is when some of or all a borrower’s outstanding balance to a credit card company is considered canceled, and the amount is no longer required to be paid. Other examples of debts that could be forgiven include student loan debt or even a personal loan.
Debt forgiveness is rare, according to Experian ® , but there may be other options to help you through financial hardship.
Some credit card companies, like Discover, offer hardship programs that may help you meet your financial obligations. Or, depending on your credit score, you could consider a balance transfer card , which could help consolidate your monthly credit payments and reduce your interest charges with an intro APR.
More common than debt forgiveness is that the lender tries to collect the debt through their debt collection department or a separate debt collector (also known as a collections agency.)
If the creditor or collections agency can't collect the outstanding debt, they may file a lawsuit. If successful, a judgment could result in the borrower having their wages garnished in some states. Before this happens, you may try contacting the credit card company to discuss the situation, or seeking assistance from a nonprofit credit counseling organization.
Since debt forgiveness is uncommon, debt relief or debt consolidation may be useful alternatives.
With debt forgiveness, your card issuer completely forgives your debts. While with debt relief or debt consolidation, you may be able to restructure your debts, get a lower interest rate, and make a more manageable monthly payment towards your outstanding balance.
Some people choose to work with debt settlement companies to help restructure debt. Be cautious when working with a debt relief company or debt settlement company. According to the Consumer Financial Protection Bureau, there may be risks associated with debt settlement companies.
For example, avoid debt settlement offers that “guarantee” they'll be able to settle your debt, as it could be a scam. They may also advise you to stop paying your credit card bill — even the minimum amount due— which could lead to late fees, accumulated interest charges, and a negative impact on your credit score. They might also charge fees for their services, putting you deeper into debt.
If you're seeking debt relief, a practical option may be to work with a nonprofit credit counseling company.
This type of organization offers credit counseling services to help empower you during a challenging financial situation.
Credit counseling is helpful because it addresses both existing debt and money management. With a credit counseling organization, you could create a debt management plan and get support in restructuring your budget. They may also advise you about tools like a debt consolidation loan which could have a lower interest rate than your current rate and typically consolidates your bills into one monthly payment. This kind of support could leave you more hopeful and less stressed.
When looking at types of credit card debt forgiveness, some options are debt settlement and bankruptcy.
Debt settlement is when a lender agrees to let a borrower pay less than the amount owed. In these circumstances, you may work directly with a card issuer to create a debt management plan instead of paying a for-profit debt settlement company to negotiate the settlement.
It’s important to note that while a creditor may be willing to stop collections on a portion of your debt as part of a debt settlement, the card issuer may have to report the settled debt to the IRS as canceled debt. In those cases, canceled debt may be taxable, and you would have to report it on your tax return, according to the IRS.
Another type of credit card debt forgiveness can occur through bankruptcy. Declaring bankruptcy can stay on your credit report for up to 10 years, which can negatively impact your credit score and may affect your ability to get new credit or open credit cards.
According to U.S. Courts, when you declare bankruptcy, a court may discharge–release you from personal liability–certain types of debts while restructuring others and preserving assets. Individuals can represent themselves in bankruptcy court or consult a bankruptcy attorney if they feel they need to pursue this option.
As U.S. Courts explains, in a chapter 7 bankruptcy, the individual may need to sell some of their assets to pay a portion of the debt. In a chapter 13 bankruptcy, the debts are restructured so the individual can pay all or some of the agreed-upon balance over three to five years. Under chapter 13, the debtor is required to complete the payment plan to receive a discharge of the remaining debts.
Secured debt (like a mortgage) and unsecured debt (like credit card debt) may be handled differently during a bankruptcy. And there are various types of bankruptcies, so be sure to research which option may be best for your situation.
If your credit card bills are snowballing, researching debt forgiveness, debt relief, and debt settlement options can be a good start. Credit card debt forgiveness is rare, but your credit card issuer may be willing to negotiate with you. You can also consider debt relief options like finding a nonprofit credit counseling organization to help you resolve debts in a manageable way with less stress.
When you’ve resolved your debt and want to start rebuilding your credit a secured credit card may be a viable choice.
Keep in mind that the qualifications and requirements for secured credit cards may vary from card issuer to card issuer. Review the terms and conditions for a secured card, and consider a card that offers pre-approval, especially if a bankruptcy has been filed or is recently present on your credit report.
