Credit Card Debt Forgiveness Program

Debt forgiveness is one way out of the ruin that credit card debt usually brings. However, before you sign up for any debt forgiveness program, make sure you know the pros and cons of the same.
WealthHow Staff
Last Updated: Sep 14, 2018
It is estimated that an average American has about USD 40,000 in credit card debt. On a national level, this amounts to about 7 billion dollars in credit card debt each month. Most people somehow manage to pay only the minimum amount each month. However, this strategy is not exactly going to help you if you wish to make some serious reductions to your debt.
The very high interest rates may force you to pay the debt for the rest of your life. Due to the large sum of credit card debt, even the Federal Government has been forced to revise programs for credit card debt help. The debt forgiveness program is a program that aims to take the financial burden off the shoulders of those crippled by credit card debt.
Credit Card Debt Forgiveness Plan
Oftentimes, people spend more than what they can afford. Thus, credit card debt keeps on piling up. Sometimes a point comes, when the person is no longer in a position even to pay off the monthly payments. As a result, the debt quickly mounts up, and full debt repayment looks like a distant dream for both, the creditor as well as the debtor.
In such cases, people often resort to debt solutions, in a hope of getting out of credit card debt. There is really no dearth of debt consolidation companies which promise substantial write offs on your debt. Usually, the amount that can be waived from your debt mostly depends upon your negotiation skills and the readiness of your creditor.
If you decide to settle credit card debt yourself, you may even manage to squeeze out up to 50% waiver on your debt. However, if you are unsure of how to handle the situation you may employ a debt settlement agency to run the matters for you. However, make sure they are legitimate and do serious business.
The debt forgiveness program works for the credit card company as well as the debtor. The debtor can save himself from going bankrupt and jeopardizing his credit report forever, while the company tries to amass as much repayment as they can before the debt goes bad.
In case of bankruptcy, the company ends up with nothing. Hence, they might prefer extracting as much as possible if complete debt repayment is not possible. However, becoming eligible for credit card debt forgiveness is not something to celebrate about. There are certain risks involved and the implications are too many.
Risks
Most people do not entertain any correspondence from their creditors after they have been granted debt forgiveness. They often end up trashing the 1099-C, which is sent by the creditors. This is the first mistake that might land you in some serious trouble with the Internal Revenue Service (IRS).
When you repay the debt amount to your creditor, your creditor becomes liable for tax on that amount. When a portion of that debt is waived off, you become the beneficiary of that amount. In that case, the onus of tax repayment is passed upon you. An example will enable you to understand this situation better.
Suppose your initial debt was USD 10,000 and you got a write off for USD 3,000, then your impending debt is USD 7,000. In that case, you end up with USD 3,000, which should have actually been your creditor's money.
Hence, you become liable for paying whatever tax amount IRS inflicts upon USD 3,000. Failure to do so may subject you to IRS audit, penalties, etc. Hence, do not forget to file 1099-C after your debt has been forgiven.
An exemption from tax is available in certain conditions. People who have gone bankrupt need not pay the tax amount. Similarly, if your financial affairs indicate insolvency (more liabilities than assets) then also you can request for exemption of tax.
In that case, you might have to file IRS form 982 along with the 1099-C should you qualify for exemption from tax. Another serious implication of debt forgiveness program is that once you enroll for that, your credit score plummets by 70 to 140 points. This may hamper your chances of getting credit in the future.
Credit card debt mostly arises as a result of inability to manage your budget. People who enroll for given programs never learn to manage their debts. Hence, think twice before you enroll for such as programs and resort to it only when you run out of other credit score friendly options.