At a Glance
It can feel as if there’s no way out when debt is piling up. Fortunately, debt forgiveness programs do provide reprieve from overwhelming debt. Debt forgiveness options differ depending on the type of debt, though, and you’ll have to consider the tax consequences of debt forgiveness.
In this article, you’ll learn:
What is debt forgiveness?
Debt forgiveness is a process during which a lender cancels some or all of the debt you owe. It may also involve slowing or stopping debt accumulation.
Debt forgiveness is different from debt settlement in that settlement involves negotiating with creditors to lessen the amount of debt you owe. Debt settlement usually damages your credit score, but most debt forgiveness programs do not.
Debt forgiveness programs and rules
Depending on what type of debt you owe, there may be different forgiveness options available to you.
Student loan forgiveness
Federal student loan borrowers have a variety of student loan debt forgiveness options available, provided they meet specific requirements.
Perhaps the most popular federal student loan forgiveness program is the Public Service Loan Forgiveness program, or PSLF. Borrowers must work in the public or nonprofit sector for 10 years and make 120 on-time loan payments to be eligible for PSLF.
The federal government also provides borrowers with several income-driven repayment plans, each offering loan forgiveness after a certain amount of time.
Remember, these programs are only for federal student loans. None of them apply to private student loans.
These days, you rarely get true mortgage forgiveness. Only during events such as the 2007-2008 financial crisis do lenders consider forgiving your debt.
However, you can likely negotiate a mortgage restructure with your lender. A mortgage restructure involves changing the loan terms to make the monthly payments more affordable for you.
Federal Housing Administration (FHA) mortgages may also qualify for restructuring.
Credit card debt settlement
Credit card companies never offer forgiveness, but you can try to get a debt settlement. You’ll essentially negotiate for one fixed amount that you’ll pay the creditors to wipe away your old debts.
Remember, settlement is not forgiveness. Your credit score will take a hit, and you may have to pay fees. You’ll also have to be vigilant about finding a reputable debt settlement firm, costing you more time. There are many debt settlement scams out there.
Tax consequences of debt forgiveness
When lenders forgive your debt, it can feel like a burden lifted off your shoulders. However, the IRS considers most forms of debt forgiveness to be taxable income if the debt is greater than $600.1
Consequently, they require you to report money saved from debt forgiveness on your tax return as ordinary income—the same kind of income as your paycheck.
The IRS provides several exceptions to this rule, one of them being the PSLF program. Under the Mortgage Forgiveness Debt Relief Act of 2007, canceled debt from mortgage restructuring and home foreclosure can be tax exempt.