Will the Creditor Forgive My Credit Card Debt?
Credit card companies rarely forgive your entire debt, but you might be able to settle the debt for less and get a portion forgiven.
Most credit card companies are unlikely to forgive all your credit card debt, but they do occasionally accept a smaller amount in settlement of the balance due and forgive the rest. The credit card company might write off your debt, but this doesn't get rid of the debt -- it's often sold to a collector. You can also wipe out your credit card debt by filing for bankruptcy, although bankruptcy is not the same as debt forgiveness.
When Credit Card Companies Forgive or Write Off Debt
A credit card company might forgive or write off some or all of your debt for the following reasons:
The Credit Card Company Considers You "Uncollectible"and Writes Off the Debt
If you stop paying on your credit card debt and become seriously delinquent, the credit card company will likely write off the debt and consider you uncollectible. At that point, the company takes your debt off it's books. However, this offers no benefit to you, because a write-off is not debt forgiveness. The credit card company simply registers the debt as a loss -- but the debt still exists.
A debt owed to the credit card company is an asset of the credit card company, and like any other asset, the creditor can sell the debt to a third party (such as a collection agency), which can then collect the debt from you. The third party debt collector can file a lawsuit to collect the debt. Once the collector receives a judgment against you, it can use the judgment to garnish (take) money out of your paycheck or your bank account. The collector can also try to obtain a judgment lien and use that to seize your property and sell it to satisfy the debt. (To learn about ways creditors and collectors can collect debts, see How Creditors Collect Debts.)
If you end up in this situation, remember that certain types of income are exempt from garnishment (for example, Social Security benefits) and certain types of property are protected from collection. If the creditor can't get your income or property, the judgment is essentially meaningless.
Example. Tony is 72 years old. He lives in an apartment; he has no significant assets. His only income is Social Security benefits. He owes $10,000 to Credit Card and can no longer afford the payments. He stops paying; eight months later, Credit Card writes off the debt and sells it to Collector for $3,000. Collector sends letters to Tony but receives no response, so Collector sues Tony for $10,000. The court enters a judgment against Tony in that amount; however, Collector has no recourse, because Collector cannot garnish Tony's Social Security, and Tony has no assets to satisfy the debt.
You Offer a Settlement
If you are delinquent on your payments and offer a lesser amount to settle the entire debt, the credit card company may accept it. Taking a settlement is sometimes less risky than suing; suing costs money, and the creditor might know it has little chance of collecting the full balance through regular methods like garnishment. If the creditor agrees to settle the debt, it will accept your settlement payment and forgive the remaining balance. (For help in negotiating a settlement in this manner, get Nolo's Offer to Settle Debt With a Reduced Lump Sum Payment.)
Example. Jane owes $12,000 to Credit Card. She knows it will take her forever to repay the full amount plus interest, because she lost her job and can't find a new one. She has $7,000 in her account and offers it to Credit Card in exchange for wiping out the debt. Credit Card agrees to the settlement. Jane pays $7,000 to Credit Card, in return Credit Card forgives the remaining $5,000 balance and considers the debt satisfied.
Bankruptcy Discharge of Credit Card Debt
If you file bankruptcy and obtain a discharge from the bankruptcy court, your credit card debt will likely be wiped out entirely. This is not debt forgiveness, however; the creditor has little choice in the matter, and the debt itself still exists. The discharge eliminates only your obligation to repay it. This might matter if you have a cosigner or a co-borrower and that person does not file bankruptcy because that person will still be responsible for the debt. (Learn more in Credit Card Debt & Bankruptcy.)
Consequences of Debt Forgiveness
The main consequence of debt forgiveness is the effect it has on your credit. There also might be tax consequences.
- If the creditor writes off the debt as uncollectible, the consequences include a blemish on your credit report for the delinquent payments as well as the write off. Additionally, the creditor will likely sell the debt to a collector, who will aggressively pursue you for the money and may sue you.
- If the creditor settles the debt with you, it will note on your credit report that the debt was settled for a lesser amount, which can have a negative impact on your credit. Additionally, the forgiven amount will be considered taxable income by the IRS and your state government, and you will have to pay taxes on it. For more information about taxation and debt forgiveness, read Tax Consequences When a Creditor Writes Off or Settles a Debt.
- If you file bankruptcy, your credit report will reflect the bankruptcy for up to ten years; however, debts wiped out in bankruptcy are not considered taxable income.
Learn about other ways to handle high credit card debt in our Managing Credit Card Debt topic.