A financial hardship can happen to anyone because of the loss of a job, a sudden illness or other circumstances. It can make it difficult, if not impossible, to make payments on your debts. In some cases you may be able to have some of your debt forgiven, but make sure you think about the consequences before deciding.
If you're in financial trouble you may be able to sign up as a volunteer with the Peace Corps or another acceptable organization, which could result in your student loans being forgiven. A teacher could have his student loans forgiven by transferring to a specified post, like an inner city school, and working there for a few years. Some mortgage programs allow for debt forgiveness in cases of financial hardship but that varies widely by lender. Bankruptcy cancels many kinds of debt, including department store charge cards and credit cards, but it won’t cancel tax debts and student loans.
Credit Card Debt
Credit card companies occasionally forgive part of your debt. Explain your situation and ask if you can settle the debt with a partial payoff. Many companies accept such a deal while writing off the unpaid amount as a business loss. Be sure to get the agreement's terms in writing before you send in a payment. Be aware that this solution doesn’t help your credit and that some lenders may be wary if they see a settlement in your credit report.
While debt relief can be helpful, it often comes with strings attached. Any debt relief that amounts to more than $600 must be reported on a 1099 tax form, the Internal Revenue Service says. Forgiven amounts will be treated as income for that year, though the taxable amount is limited in some cases. Forgiveness could have a big impact on your taxes, so make sure it's your only option before proceeding.
If you decide that debt forgiveness isn’t right for you, talk to your creditors about getting caught up on your debt. One way to help your situation might be a period of forbearance, a set amount of time during which you don’t make any payments. Another option is working with your lender to reset your payment schedule. Lenders may also reduce the amount of your monthly payments or cut your interest rates. These methods may not help your overall credit but they're usually better than falling even further behind.
- Bills.com: Hardship Program
- FinAid: Loan Forgiveness
- MSN Money: Can Your Student Loans be Forgiven?
- IRS: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
- My FICO: How to Repair Your Credit and Improve Your FICO Credit Score
- Kiplinger: If I Negotiate a Payoff will it Hurt My Score?
- Bills.com: Credit Card Debt Settlement
- MSN Money: 5 Ways to Kill Your Credit Scores
- State of California: Mortgage Forgiveness Debt Relief Extended
- MyFICO: Credit Report Q&A
- Internal Revenue Service. "Topic No. 431 Canceled Debt – Is It Taxable or Not?" Accessed Jan. 20, 2020.
- Internal Revenue Service. "Instructions for Forms 1099-A and 1099-C (2020)." Accessed Jan. 20, 2020.
- Internal Revenue Service. "What's New - Estate and Gift Tax." Accessed Jan. 20, 2020.
- Internal Revenue Service. "Publication 4681: Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals)." Accessed Feb. 14, 2020.
- Internal Revenue Service. "Home Foreclosure and Debt Cancellation." Accessed Jan. 20, 2020.
- Internal Revenue Service. "Publication 970 (2018), Tax Benefits for Education." See: 5. Student Loan Cancellations and Repayment Assistance. Accessed Jan. 20, 2020.