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What is Credit Card Debt Forgiveness, and How Does it Work?


Epic Loans Editorial Team

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In a world where financial challenges are becoming increasingly common, credit card debt can feel overwhelming. However, for those grappling with unpaid credit card balances, credit card debt forgiveness is a beacon of hope.

This blog aims to unravel the mystery surrounding credit card debt forgiveness, delving into various topics, including the types of credit card debt forgiveness policies available, their consequences on tax and credit scores, and a comprehensive comparison between credit card debt forgiveness and debt settlement.

What is Credit Card Debt Forgiveness?

Credit card debt forgiveness is a financial arrangement where a creditor agrees to forgive or cancel a portion of a borrower’s outstanding credit card debt. This process helps borrowers facing significant financial hardships, making it difficult or impossible for them to repay the total amount owed.

Some might picture credit card debt forgiveness as credit card companies forgiving their debt without any impact on their lives. The truth is a little less ideal. While debt forgiveness is a real possibility, it usually means paying off a portion of the debt rather than the whole amount owed. It is rare to achieve full debt erasure and often requires drastic measures, such as declaring bankruptcy.

What are the Types of Credit Card Debt Forgiveness?

Two of the most common possibilities by which credit card debt can be forgiven are debt settlement and bankruptcy.

Debt settlement is the process by which a lender and borrower negotiate a payment arrangement in which the lender accepts a partial repayment. This process may involve direct communication with the card issuer, allowing the creation of a debt management plan without the need for a for-profit debt settlement company.

However, there could still be repercussions even if a creditor agrees to stop collection on a portion of the debt. In particular, the card issuer might have to notify the IRS that the debt has been canceled. In such instances, the debt cancellation may be deemed taxable income, which means you will need to disclose it on your tax return as per IRS requirements.

Filing for bankruptcy is another way to get your credit card debt canceled. However, there are long-term consequences to this option since it can stay on your credit report for up to ten years. This could negatively influence your credit score and make it more difficult for you to get new credit or open new credit cards.

According to the U.S. Courts, filing for bankruptcy involves a court’s judgment to exempt a person from the responsibility of repayment for certain types of debt. The court may attempt to preserve important assets and restructure other debts at the same time. When considering bankruptcy, people can choose to represent themselves in court or seek counsel from a bankruptcy lawyer to navigate this complex process.

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Tax consequences of credit card debt forgiveness

If the forgiven amount is more than $600, the creditor is required to issue IRS Form 1099-C detailing the total forgiven amount. A fundamental measure to determine whether taxes are due on this amount is the solvency test. This test compares the fair market worth of your assets to all of your liabilities to check if you were insolvent prior to accepting a settlement.

For instance, let’s assume that your assets had a fair market value of $12,000 and that your total liabilities before settlement were $14,000, leaving you $2000 insolvent. In this case, if the amount forgiven is $4,000, you will be taxed on the $2,000 difference. In these situations, navigating income tax reporting can be difficult, making it wise to consider seeking professional advice from a tax attorney.

What are the Consequences of Debt Settlement on Credit Scores?

Bankruptcies and debt settlements both frequently leave a lasting mark on your credit history. Typically, the records stay on your credit report for 7 to 10 years. This negatively affects credit scores and makes approvals on automobile loans or mortgages less likely in the future.

Read More : Does Debt Consolidation Hurt Your Credit

Comparison between Credit Card Debt Forgiveness and Debt Settlement?

While both the Credit Card Debt Forgiveness program and debt settlement share the common goal of helping clients pay less than the full owed amount, their methods and results differ greatly. The Credit Card Debt Forgiveness program sets itself apart by partnering with lenders who are prepared to forgive between 50 and 60 percent of the outstanding debt. With a predetermined agreement, clients make equal monthly payments over 36 months, ensuring a steady reduction of the balance until it is fully paid off. The program’s appeal is increased by the ability to pay off the amount early without incurring penalties.

Conversely, debt settlement involves one-on-one talks over a two to three-year period with each creditor, with no assurance that creditors will consent to a 50%-60% payment. The balance continues to attract late payment penalties and interest charges, further complicating matters. Clients who choose to settle their debts must also stop making monthly payments to their creditors and instead put them into an escrow account for a potential lump-sum settlement offer. Interest and late fines cause the loan balance to increase in the meantime.

One important difference between forgiveness programs and debt settlement is that the former provides an up-front decision on whether creditors will accept the terms, while the latter does not. The Credit Card Debt Forgiveness program also offers protection from prospective lawsuits, wage garnishments, or property liens, acting as a barrier against collection agencies and legal actions. For anyone looking for financial assistance, the Credit Card Debt Forgiveness program is an appealing choice because of its dual benefits and guarantee of affordable debt payments.

Read More : Best Ways to Consolidate Credit Card Debt

Conclusion

In summary, credit card debt forgiveness serves as a potential lifeline for individuals facing overwhelming financial burdens. Unlike other debt forgiveness programs, the Credit Card Debt Forgiveness program leverages pre-existing connections with creditors to negotiate lower payment terms. With equal monthly payments spread over 36 months and the flexibility to pay off the sum early, this program provides a clear and structured path to debt relief.
To explore viable options for debt relief tailored to your financial situation, consider consulting experts at Epic Loans. Schedule a complimentary consultation today and take the first step toward securing your financial future. Additionally, you may also explore the option of a credit card debt consolidation loan to further alleviate your financial stress.

Frequently Asked Questions

How do you apply for credit card debt forgiveness?

The terms to join a Credit Card Debt Forgiveness program are:

  • Your creditor should be a part of the program
  • Your account should be fully charged off (no payments for at least 120 days)
  • Your balance should be at least $1,000
  • You must pay off the balance within 36 months, with no extensions allowed
Does credit card debt affect your credit score?

One of the main factors affecting your credit score is how much debt you have on your credit card. Therefore, using your credit card to its limit is not advised, as this may cause your credit score to drop.