How Does Credit Card Debt Forgiveness Work and Should You Consider It?

By Ana Gonzalez-Ribeiro, MBA, AFC®
Published on: 01/13/2022

If you’re dealing with significant debt and are looking for a way out, credit card debt forgiveness is one option. But true debt forgiveness is hard to come by, and there are scams and dubious offers out there you’ll need to avoid if you want to pursue it.

What is credit card debt forgiveness?

Credit card debt forgiveness is when a credit card company forgives some or all of your outstanding debt.

The term “debt forgiveness” sounds too good to be true. Would a credit card company really simply cancel all or part of your debt? As you might suspect, it’s not quite as simple as that. Credit card debt forgiveness isn’t something that just happens: You have to take action to get there, and that action usually comes at a cost.

So you have to ask yourself, “Is it worth it?” Or is some other strategy more appropriate?

One of the most common strategies is negotiating a settlement with your credit card company that involves paying off some of your debt in exchange for canceling the rest. For example, you might agree to pay $7,000 of a $10,000 balance if the company wipes out the remaining $3,000.

But there are consequences to debt forgiveness that you should know about before taking this step. Your credit is likely to suffer, at least in the short term, and you may have to give up your credit card, too.

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Credit card debt forgiveness options

If your debt has become too big to manage, don’t panic because you still have options. Before taking drastic measures, like declaring bankruptcy, talk to your lender about your options. They may work with you to reduce your interest rate. You can also seek credit or financial counseling, cut back on expenses or grow your income to put towards your debt, try different debt payoff methods (like the Debt Snowball or Debt Avalanche methods), or shop around to see if you qualify for a 0% APR balance transfer deal.

If you’ve already tried all those, then it may be time to take more drastic action, such as bankruptcy or debt consolidation (see below). Another alternative, if you have a home with equity, is to consider a home equity loan. The most important step to take, no matter what option you choose, is to create a plan to stay out of credit card debt once you’re finally free of it. Otherwise, it’s easy to slip back into debt again later.

Talk with your credit card companies

Negotiating with your credit card company is better than simply avoiding the issue and not paying, because they’ll see you’re willing to pay something. If it’s clear you can’t afford to pay the entire amount, they may see something as better than nothing.

If you have a long history of being a good customer with a credit card company (meaning you have a history of on-time payments with them), call and tell them you’re trying to get more serious about paying down your debt, and would like to see if they could reduce your interest rate.

For example, you might be able to get your interest rate reduced by 0.5%. While that doesn’t sound like much, it can significantly reduce the amount of interest you’ll have to pay over time as you pay down your debt.

Ask if they have any other options for reducing what you owe. If you’re struggling to pay because of financial hardship (such as job loss or medical issue) ask if they have any programs or options for people in your situation.

A card issuer won’t always work with you, but if you don’t ask, the answer’s always no.

Reach a debt settlement agreement

Before attempting to reach a debt settlement agreement, first verify that you owe everything on your credit card account by reviewing your transactions to make sure there are no fraudulent charges or requesting debt verification from your lender.

Once you’ve done that, you can try writing a debt settlement letter, in which you explain why you are unable to pay your debt in full. Include any financial hardship (such as unexpected medical bills or a job layoff), offer a specific lesser amount instead, and detail what you’re asking in return.

Debt settlement can be a delicate proposition because you'll need to have sufficient money to back up your offer if it's accepted. You'll likely be required to make a lump-sum payment of the remaining balance.

As with any negotiation, it's probably best to start with by offering something less than what you can pay, but which is still reasonable. If you begin to close to the maximum you can pay, you'll have no room to bargain if your offer is rejected.

If this sounds daunting, you can pay a debt settlement company to do this for you, but you should be aware of the risks involved. Such companies are, on average, able to settle only 45% to 50% of a borrower’s debt.[2] Companies will have to negotiate with each of your creditors and are likely to be more successful with some than with others, and you may end up owing even more money with fees and interest.

Settling a debt can also cause your credit score to fall because it will appear on your credit report as a debt not fully paid.

Declare bankruptcy

Bankruptcy is the ultimate form of debt forgiveness. It’s an option of last resort that can allow you to start with a clean slate as far as your debt is concerned, but it isn’t a panacea.

First, you’ll have to decide which form of bankruptcy is best for you. Either one will have to be approved in federal court.[3]

Suppose you choose Chapter 7 (or "straight" bankruptcy). In that case, you'll likely have to sell many or even most of your assets to pay creditors. (Although you may be able to keep a few things, such as your car and basic household furniture.)

With Chapter 13 bankruptcy, you still have to repay your debts. Still, under this "wage earner's plan," you'll be able to do so over three to five years according to a court-approved schedule. This is for filers who make too much money to be considered for Chapter 7. (Under the CARES Act, coronavirus pandemic relief aid is not included in this calculation.)[4]

On the plus side, your property won’t be sold off to satisfy your debt in a Chapter 13 bankruptcy.

It’s worth mentioning that some forms of debt, such as federal student loan debt, can’t be discharged in bankruptcy. It will also cost you money to file for bankruptcy: Attorney’s fees cost approximately $1,450 for a Chapter 7 bankruptcy filing and $3,000 in Chapter 13 cases, a 2016 study found.[5] Bankruptcy can also be a major hit to your credit score, although this will diminish over time and won’t be as severe if you already have bad credit.

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Advantages of credit card debt forgiveness

The most apparent advantage of debt forgiveness is that it can reduce the amount you owe and ease your financial burden. You may feel less stress with less debt and fewer phone calls from debt collectors.

Debt forgiveness may also improve your credit score in the long run by making it easier for you to keep up with your payments. (However, it’s worth keeping in mind that it can also hurt your credit score if it shows on your reports as not paid as agreed, and/or if you have a history of late/missed payments leading up to it.)

Payment history is a major factor in calculating your FICO® score. Debt forgiveness may also lower your credit utilization ratio (your debt relative to your credit limit), which is a factor in calculating your credit score.

Disadvantages of credit card debt forgiveness

Debt forgiveness is not without its disadvantages. You may face tax liabilities or see a drop in your credit score, and you face the prospect of being rejected on future loan applications. You’ll also have to be on the lookout for scams.[6]

Tax consequences

Credit card issuers may report to the IRS. You may be required to report the forgiven amount of your unpaid debt to the IRS as taxable income. If the forgiven debt exceeds $600, you'll have to report it on Form 1099-C (the tax agency received nearly 4 million such forms in 2018).[6]

Can lead to rejected loan or credit applications from lenders

A lower credit score, in turn, can lead to the prospect of future rejected applications. Lenders may view the settlement on your credit report as evidence that you're a poor risk. The lender may believe that if they give you a loan, they may have to accept less than full repayment from you.

Other debt relief options

Create a debt management plan

In a debt management plan, you work with a nonprofit credit counseling agency to assess your financial situation and develop a plan for improving your personal finances by reducing your debt. Credit consolidation is usually a part of the plan.

Consolidate your debt

You can try to get a better handle on what you owe by bundling your debt through a consolidation loan. The idea is simple: You take out a loan to pay off all your cards, then repay that loan.

Debt consolidation can help your credit (as long as you make on-time payments on the new loan) by reducing your credit utilization ratio. It can also enable you to make smaller monthly payments, although this will extend the amount of time you’ll need to pay off the loan.

This strategy can reduce everything to a single monthly payment, perhaps at a lower interest rate, but it won’t reduce the overall amount you owe, and if that amount is already too much for you to handle, that won’t help.

You might be able to transfer all or part of your debt to a 0% introductory APR credit card. Though with some cards you'll pay a balance transfer fee of 3% to 5% of your balance (up to $500 on a $10,000 debt). That fee could offset the advantage of transferring your balance. And if your debt is significant, you may not be able to transfer the total amount.

Plus, the new terms will simply keep interest from accumulating during the introductory period, which is often six months or a year; it won't reduce the principal you owe. It won't stop interest from accruing again after the introductory period.

Contact a credit counselor

Credit counseling is an important part of a debt management plan that can help you better manage your finances and reduce your debt. It can also help you develop good habits and a plan to avoid debt in the future.

Credit counselors are typically nonprofit agencies such as the National Foundation for Credit Counseling, instead of credit repair or debt settlement firms, which work for a profit. A credit counselor can help you formulate a repayment plan for unsecured debts like credit card balances and personal loans, student loans, and other types of debt.

While credit counselors usually don't negotiate to reduce the amount of money you owe, they can help cut your monthly payments through debt consolidation. Sometimes they use other strategies like paying off high-interest credit cards first.

They’ll also help you with general money-management strategies that can keep you from getting into further debt.[7]

Debt forgiveness isn't easy, but may be worth a try

Debt forgiveness can be a misnomer, and it isn’t as easy as the phrase makes it sound. But it can be worthwhile if you explore all the options available to you and make an informed decision based on your situation and goals.


  1. Consumer Reports. “More Than a Third of Volunteers in a Consumer Reports Study Found Errors in Their Credit Reports,” Accessed August 27, 2021.
  2. Federal Trade Commission. “The Association of Settlement Companies (TASC) Study on the Debt Settlement Industry,” Accessed August 27, 2021.
  3. Federal Trade Commission. “Debt Relief or Bankruptcy?” Accessed August 23, 2021.
  4. Investopedia. “What is Chapter 13?” Accessed August 23, 2021.
  5. “The Cost Of Bankruptcy,” Accessed August 23, 2021.
  6. Investopedia. “Cancellation of Debt (COD),” Accessed August 23, 2021.
  7. Consumer Financial Protection Bureau. “What's the difference between a credit counselor and a debt settlement or debt relief company?” Accessed August 27, 2021.

About the author

Jeff Smith is the VP of Marketing at Self Financial. See his profile on LinkedIn.

About the reviewer

Ana Gonzalez Ribeiro, MBA, AFC® is an Accredited Financial Counselor® and a Bilingual Personal Finance Writer and Educator dedicated to helping populations that need financial literacy and counseling. Her informative articles have been published in various news outlets and websites including Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. She also founded the personal financial and motivational site and translated into Spanish the book, Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches Spanish or English personal finance courses on behalf of the W!SE (Working In Support of Education) program has taught workshops for nonprofits in NYC.

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Written on January 13, 2022
Self is a venture-backed startup that helps people build credit and savings.

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