What to Know About Debt Forgiveness

Even a debt forgiven may have unexpected costs

A man works out debt forgiveness with a laptop, a smartphone, and a pile of papers.
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For anyone carrying a lot of debt, the idea of having that debt somehow forgiven can seem hopeful. Who wouldn’t want the burden swept away, especially if the debt is ruining your finances? And while the idea of debt forgiveness sounds great in theory, different types of debt come with their own rules, and there’s almost always a catch.

Learn more about what debt forgiveness is all about, how it can be applied to different types of debt, and what your other options are if you’re struggling.

What Is Debt Forgiveness?

Debt forgiveness happens when a lender reduces the amount of debt a creditor owes or wipes away the debt entirely. In most forgiveness situations, debt reduction comes with major strings attached. These may include a negative hit on your credit or tax consequences on the amount forgiven.

Rules vary depending on the type of debt, and while government-sponsored debt forgiveness programs pop up from time to time, they are usually temporary. 

Student Loan Debt Forgiveness

Of all the types of debt, student loans actually do have true debt forgiveness programs. However, you must follow very specific parameters, you will still have to make payments for a number of years, and forgiveness only applies to certain federal student loans, not private ones.

There may be sweeping student loan debt forgiveness on the horizon, however, but only time will tell.

Public Service Loan Forgiveness

College graduates who go on to employment with nonprofit organizations or the government may be eligible for the Public Service Loan Forgiveness program (PSLF). You must first make 120 on-time payments on your loans while working for a qualified employer. Those who meet those requirements will have the remainder of their federal student loan debt forgiven. 

So far, eligible borrowers have had a hard time receiving forgiveness. The Department of Education has denied about 98%-99% of PSLF applications, according to multiple analyses.

Teacher Loan Forgiveness

For teachers who work for five consecutive years in schools or educational service agencies that are in low-income areas, student loan debt forgiveness of up to $17,500 may be available. The U.S. Department of Education publishes a list of eligible low-income institutions each year. 

For PSLF and teacher loan forgiveness, there is no tax liability for the forgiven debt. 

There is one other type of student loan forgiveness that has to do with the type of repayment schedule borrowers choose. For those who decide to pay back their debt using income-driven options, after 20 to 25 years of repayment (depending on the program), any remaining debt will automatically be wiped clear. For this type of forgiveness, however, you will have to pay income tax on the forgiven amount.

Credit Card Debt Forgiveness

When you owe money on your credit cards, there’s really no actual forgiveness programs that will allow you to have your balance wiped out. However, borrowers facing hardships do have some options at their disposal that could help reduce or even eliminate their balances, but they have a big impact on long-term credit health. 

These include debt settlement (where a third party negotiates down the amount owed) and bankruptcy (in which you can have some or all of the debt discharged).

Mortgage Debt Forgiveness

Mortgage lenders will work with borrowers in tough financial situations to help reduce their monthly bills or overall debt burden. Through modification programs (which can increase the term of the loan, but lower payments), foreclosure prevention programs, and short sales, some people may get debt relief this way, although historically, the government taxes the forgiven debt as income.

With a loan modification, the lender agrees to reduce the loan’s principal, effectively forgiving part of the debt. With a short sale, the owner sells the home for less than the value of the loan, and the lender agrees to forgive the difference rather than seek repayment of the amount still owed. 

A law passed in the early days of the 2008 financial crisis changed that, and forgiven mortgage debt, up to certain amounts, was excluded from taxation. Since passage, the Mortgage Forgiveness Debt Relief Act has been extended (and modified) several times. Currently, and through 2025, up to $750,000 of mortgage debt forgiven through a loan principal reduction or a short sale is not taxable.

Other Options for Dealing With Debt

Unlike the student loan forgiveness programs mentioned above, most scenarios that allow borrowers to reduce their debt only emerge once the borrower has fallen far behind on payments. For anyone struggling with debt, here are some of the options that may be available to you.

DIY Negotiation

It’s always smart to work with your creditors and lenders directly if you are on the verge of a financial hardship. Don’t wait until you’re missing payments. Reach out and be upfront—many lenders have programs designed specifically to help borrowers get through rough patches. 

You might even be able to reduce your balance by agreeing to pay a lump sum. This tactic can be especially effective in the case of medical debt. Other times, you could try working out a payment plan, which usually involves breaking up a large balance over a period of time. Or, you might inquire about lowering your minimum payment on a temporary basis until you’re back on your feet. 

Credit Counseling

Before resorting to debt strategies that could harm your credit or that you don’t fully understand, you should start by researching your options. The best place to start is with a non-profit credit counseling organization. They will first help you assess your situation, and then go over the pros and cons of your options. If you choose to work with a credit counselor, they can also help you negotiate a payment plan for your unsecured debt. 

Debt Management Plans

If you have multiple unsecured debt balances, you may decide to enlist the help of a credit counseling agency who can work out a formal debt management plan (DMP) for you with your creditors. You then pay the credit counseling agency a set amount each month, and they make the payments to your creditors on your behalf. 

Debt Settlement

Some consumers seek the help of a third-party debt settlement company, which may ask creditors for partial debt forgiveness on your behalf, among other tactics. Just be mindful that debt settlement firms charge fees, their strategies can hurt your credit, and there are some shady players in this space. Be sure to do your research to find a reputable debt relief company

The debt settlement process can do major damage to your credit score. You will also have to report the amount of debt forgiven as taxable income. 

Bankruptcy

Some consumers can discharge some or all of their debt through a formal bankruptcy process. How the debt is handled will depend on if you file for Chapter 7 or Chapter 13 bankruptcy, the latter of which requires you to complete a repayment plan over a set amount of time before the remaining debt is cleared.