Credit card debt forgiveness has become more main stream since the beginning of the recession. In fact, it seemed like every time you flipped on the TV, radio or Internet, there was an advertisement on about managing your debt through credit card debt forgiveness. Like typical advertisements, however, none of them really explain what the program entails.
While many of these programs have dissipated over the last year or two, there are still some debt forgiveness programs still available. A quick look at the entire process should help answer any questions that you may have if you are considering this type of program for debt relief.
What Is Debt Forgiveness?
Debt forgiveness is the process by which a credit card company removes a portion of your principal balance to eliminate your debt. This is different than debt restructuring or debt settlement. During a restructuring or settlement, fees and other charges are generally removed from the debt, but the principal balance remains.
The principal debt is debt that you actually used to make a purchase. Most companies will not forgive this portion of your debt, unless it is a last-chance way to collect on what is owed. For a short period, in 2009, the government had a program for credit issuing companies to be reimbursed by the government for any debt forgiveness they issued. However, the stimulus money is no longer available for these programs.
If I Qualify For Debt Forgiveness What Happens Next?
If your credit card company is willing to reduce your debt through debt forgiveness you can expect the following:
• Your principal balance will be reduced by the amount stated.
• Your account will be immediately closed by the creditor
• It is possible that the total amount of your balance may become due in full at that time
• Payment arrangements may be made. However, it is important to find out if interest will incur on the remaining debt.
• The credit bureaus will be notified that this type of transaction occurred on your account
• You will receive a 1099-Misc form from the company at the end of the year to report the reduction as taxable income.
Most people do not realize that any forgiveness they receive must be claimed as income on their taxes the following year. Under the IRS code, you have spent that money for your benefit, therefore it is income. Failing to claim this write off as income could result in fines and penalties from the Internal Revenue Service.
What About My Credit Score?
Your credit score will be adversely affected by debt forgiveness, but only for a short while. There would be a much larger impact on your credit score if you failed to pay the debt at all, or entered into bankruptcy.
So Is This Right For Me?
Debt forgiveness should be used with caution. If you are able to withstand the short term hit to your credit score, and can cover the taxes the following year, it might be a good way for you to eliminate your debt.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.