Debt forgiveness, also known as debt relief or debt cancellation, refers to reducing or eliminating debt owed by individuals, corporations, or even entire countries. There are various ways debt can be forgiven, from personal debts being discharged through bankruptcy to government programs providing mortgage relief. Debt forgiveness can help provide a fresh start for those struggling with unmanageable debts.
Types of debt that can be forgiven
Many different types of debts may be eligible for forgiveness, discharge, cancellation, or relief. Common categories include:
Personal/consumer debt
- Credit card debt
- Medical debt
- Personal loans
- Payday loans
For personal debts, filing for bankruptcy is one of the main options that can allow for eliminating or reducing debts through liquidation or reorganization. Certain debts like student loans are more difficult to discharge through bankruptcy.
Mortgages
Struggling homeowners may seek mortgage relief through programs like:
- HAMP – Home Affordable Modification Program
- HARP – Home Affordable Refinance Program
- HAFA – Home Affordable Foreclosure Alternatives Program
These government-backed programs can facilitate mortgage modifications, principal reduction, and short sales to avoid foreclosure.
Student loans
Federal student loans may qualify for forgiveness after a certain number of years through programs like:
- Public Service Loan Forgiveness
- Teacher Loan Forgiveness
- Income-Driven Repayment Forgiveness
Permanent disability discharge and school closure discharge are other options for federal loans.
Business debt
Businesses and corporations can reduce debts through restructuring and bankruptcy proceedings like Chapter 11 and Chapter 7 liquidation.
Government debt
Sovereign debt held by countries can be forgiven or reduced through official government policies or multilateral negotiations.
Most common ways personal debt gets forgiven
For individual consumers, some of the most common options for debt relief include:
Bankruptcy
Filing for bankruptcy is a legal process administered by federal courts that can eliminate or restructure debts for a fresh start. The two main types are Chapter 7 bankruptcy, which liquidates assets to pay off debts, and Chapter 13 bankruptcy, which reorganizes debts through a 3-5 year repayment plan.
Debt settlement
Debt settlement involves negotiating directly with creditors and collectors to pay a lesser amount, often 30-50% lower than the total balance. This provides relief, but can negatively impact credit scores.
Paying off debt
Completely paying off an account through lump sum payments or an extended repayment plan results in a zero balance, ending the debt obligation.
Disability discharge
Federal student loans and some other types of debt can be forgiven in cases of total and permanent disability.
Refinancing
Refinancing loans like mortgages and student debt can help lower interest rates and monthly payments, reducing overall costs.
Statute of limitations
If the statute of limitations has expired on old debts, they effectively become time-barred, and collectors may no longer sue to recover the amounts owed.
Does medical debt get forgiven?
Medical debt can be reduced or eliminated in certain circumstances. Some of the main options for medical debt forgiveness include:
- Negotiating directly with hospitals and providers for lower payment plans or settled amounts
- Applying for charity care assistance programs offered by non-profit hospitals
- Using credit counselors to negotiate lower payoffs
- Including medical debt in a bankruptcy filing
- Letting debt expire beyond the statute of limitations
Additionally, some states like New York are implementing reforms and protections restricting aggressive collection against patients, potentially forgiving or limiting accounts sent to collection.
Can you get student loans forgiven?
There are programs that allow for federal student loan forgiveness after meeting certain criteria:
Public Service Loan Forgiveness (PSLF)
The PSLF program forgives the remaining balance on Direct Loans for qualifying public service employees after 120 qualifying monthly payments under a repayment plan while working full-time for an eligible employer.
Teacher Loan Forgiveness
Teachers in certain specialties working at low-income schools may receive principal loan forgiveness of up to $17,500 on federal loans after 5 consecutive years of teaching.
Income-Driven Repayment (IDR) Forgiveness
Federal loan borrowers in IDR plans like PAYE, REPAYE, and IBR can have loans forgiven after 20-25 years of monthly payments based on disposable income.
Permanent disability discharge and school closure discharge are other options for getting federal student loans forgiven.
Can you get your mortgage forgiven?
Struggling homeowners do have options for mortgage relief and forgiveness, including:
Loan modifications
Lenders may agree to modify mortgage terms to lower payments through options like extending the repayment period, lowering interest rates, deferring payments, or splitting the loan balance into a first and second mortgage.
Principal reduction
The lender may agree to reduce the total amount owed on the mortgage loan, lowering the principal balance and monthly payments.
Short sales
With lender approval, a homeowner can do a short sale and sell their home for less than the remaining mortgage balance owed, relieving them of debt.
Deed in lieu of foreclosure
Also called a voluntary repossession, the borrower surrenders the property deed to satisfy the mortgage debt and avoid foreclosure.
Do banks forgive credit card debt?
Credit card companies and banks are sometimes willing to negotiate debt relief options for delinquent accounts, including:
- Settling accounts for less than the full balance through lump-sum payments
- Setting up extended repayment plans at reduced monthly payments
- Lowering or waiving interest rates and fees like late charges
- Temporarily reducing or suspending minimum payments
To receive credit card debt forgiveness, consumers need to actively contact issuers and negotiate agreeable terms. Including credit card balances in bankruptcy filings also discharges the unsecured debts.
Can payday loans be forgiven?
Payday loans rarely include formal debt forgiveness provisions. However, some options borrowers can pursue include:
- Arranging an extended repayment plan with the lender
- Refinancing into an installment loan with lower rates
- Borrowing money from family or friends to pay off the payday lender
- Including payday loans in a Chapter 7 or Chapter 13 bankruptcy case
- Challenging illegal or abusive loans for possible cancellation
Avoiding payday loans altogether through financial counseling or affordable loans from credit unions can help prevent being stuck in debt traps.
Can old utility debt be forgiven?
Old utility debts often can be negotiated or reduced over time. Utility forgiveness and assistance options include:
- Payment plans – Utilities may allow repayment of back bills over 6-12 months
- Debt restructuring – Lump-sum payments may settle accounts at lower amounts
- Debt forgiveness – Utilities write off older inactive accounts after several years
- Bill assistance – Programs help limit shut-offs and supplement payments
- Bankruptcy discharge – Utility bills included in Chapter 7 liquidation
Connecting with utility counselors and consumer advocacy groups can help negotiate debts and access affordability programs.
Does debt ever really get forgiven?
Yes, it is possible for many types of debts to be legitimately forgiven, cancelled, discharged or otherwise eliminated in certain situations. Some examples include:
| Type of Debt Forgiveness | Overview |
| Bankruptcy Discharge | Eliminates or restructures debts through Chapter 7 or Chapter 13 bankruptcy proceedings. |
| Student Loan Forgiveness | Federal student loans forgiven after 20-25 years on IDR plans or 10 years in public service. |
| Mortgage Principal Reduction | Lenders reduce total amount owed on a mortgage by forgiving principal balance. |
| Medical Debt Charity Programs | Hospitals write off bills for low-income uninsured patients who qualify. |
| Collections Statute of Limitations | Old debts generally become legally uncollectible and forgiven after state time limits expire. |
However, most debt forgiveness involves effort on the borrower’s part to actively negotiate settlements or take legal action. Creditors and lenders will rarely proactively reach out to forgive debts out of goodwill. Consumers need to research their options and pursue opportunities that make the most financial sense for their situation.
What happens when debt is forgiven?
When any type of debt is discharged, cancelled, or forgiven, the account balance owed reduces to zero, relieving the borrower’s obligation to continue making payments:
- The creditor writes off the debt and stops collection efforts
- The debt is removed from the borrower’s credit report
- The borrower no longer owes monthly payments on the account
- No further interest accrues on the forgiven amount
However, there may be tax consequences in some cases where the IRS counts the forgiven debt as taxable income. This occurs mainly with mortgage debt relief and cancellation of some business loans.
Impact on credit scores
Debt forgiveness can harm credit scores if it occurs through options seen negatively by credit bureaus, like debt settlements. Bankruptcy and foreclosures also damage scores. But improving repayment behavior and letting time pass allows scores to gradually recover.
Emotional relief
In addition to financial impacts, borrowers often feel an immense sense of emotional relief and reduced stress after eliminating large debts that were difficult to repay.
Debt forgiveness vs. debt consolidation
Debt consolidation is sometimes confused with debt forgiveness, but they differ significantly:
Debt consolidation
- Combines multiple debts into one new loan
- Still obligated to repay full amounts owed
- May reduce overall interest costs
- Simplifies repayment with one monthly payment
- Typically does not reduce total balance
Debt forgiveness
- Eliminates part or all of amounts owed
- Creditors agree to discharge debts
- Write-offs reduce or zero out balances
- Provides financial fresh start
- Can negatively impact credit (except loan forgiveness programs)
For consumers struggling with high debt loads, full or partial forgiveness provides more relief than consolidation alone. But consolidating can make payments more manageable while pursuing forgiveness.
Will debt eventually be forgiven?
Debts are generally not automatically forgiven over time. Specific action is required by consumers, whether negotiating directly with lenders, utilizing legal options like bankruptcy, or qualifying for government and non-profit assistance programs.
Exceptions where debts may eventually be cancelled due to inaction include:
- Collections statute of limitations – Old debts become legally unenforceable after state time limits pass, ranging from 3-10 years typically.
- Government write-offs – Federal agencies may discharge very old inactive debts deemed uncollectible.
- Lender charge-offs – After default, lenders will often write off bad debts for accounting purposes but may still attempt collection.
For most borrowers struggling with debt, taking timely action gives the best chance for substantial forgiveness and financial recovery. Waiting for debts to automatically disappear is not realistic.
Are there legitimate companies that help with debt forgiveness?
Yes, there are many well-established companies and non-profit organizations that legally assist consumers with debt relief through services like:
- Credit counseling – Non-profits provide free budgeting and debt advice, negotiating repayment plans with creditors.
- Debt settlement – For-profit firms settle accounts for less than owed through lump sums.
- Bankruptcy attorneys – Legal experts file Chapter 7 and Chapter 13 bankruptcy cases.
- Student loan counselors – Assist borrowers with applications for forgiveness programs.
- Foreclosure assistance – Housing counselors and lawyers aid troubled homeowners.
However, consumers should research companies thoroughly and watch for debt relief scams that make false promises. Legitimate firms will explain programs, risks, fees, and outcomes accurately with no guarantees.
Conclusion
While rarely easy, debt forgiveness is feasible through various means for those experiencing financial hardship or excessive debts. Established programs, laws, and assistance providers can facilitate reducing or eliminating many types of consumer, mortgage, student loan, medical, and credit card debt to grant a fresh financial start. Forgiveness options should be carefully researched and pursued diligently for maximum relief potential.
