Loan forgiveness is not offered to most borrowers. When you sign a loan contract, you are legally bound to repay your lender for the amount specified in the loan. Even a bankruptcy judge does not have the authority to completely cancel a debt. However, loans may be forgiven at a lender's discretion. The lender must agree to the terms of forgiveness and approve any actions taken by the borrower or court to dismiss responsibility to repay the debt.
Loan Forgiveness Programs
Determine if your qualify for a loan forgiveness program. The most common programs are available for federal student loans. In order to qualify, you must be involved in one of the public service options accepted by the federal government. Options include military service, the Peace Corps, Americorps or other low-paying service jobs.
Pay your debts for the minimum required time period. Even with federal student loan forgiveness programs, you must make a sizable personal contribution to repay your debts. In many cases, you will have to make minimum, on-time payments for up to six years before gaining eligibility for forgiveness.
Serve your profession for the minimum qualifying time. You cannot simply serve for one year in a low-paying job in order to have your debts forgiven. The program is designed to benefit those individuals choosing a low-paying, public service career. For example, according to the The National Defense Education Act, you must serve at least five years in a teaching position prior to receiving a 30 percent debt forgiveness on a Perkins loan.
Apply for forgiveness. Follow the process to apply for loan forgiveness in your chosen program. Remember: State agencies also assist in loan forgiveness and repayment, even if you have a federal loan. Research programs in the state where you work in order to increase your chance at loan forgiveness.
Follow up to ensure your loans are forgiven. The sum you still owed will disappear from the outstanding debt balance on your credit report, and the lender will report the individual loans as satisfactorily repaid.
Determine if you qualify for bankruptcy. If you do, you may be eligible for debt reduction or forgiveness in a court of law.
File for bankruptcy. Once you have filed, stop all contact and payments with your existing lenders. The trustee overseeing your bankruptcy is now your debt liaison.
Prepare a hardship declaration for the court. Examples include medical emergencies, loss of job or sudden disability. You will need to document your hardship by showing the drastic and indefinite change in your ability to repay the loan. For example, permanent disability can be documented through physician's statements. Even in bankruptcy, the vast majority of debts are not eligible for forgiveness. You must show that repayment of a debt will cause you significant undue hardship in order to have the debt forgiven.
Plead your case with your trustee. The trustee will hear the circumstances of your hardship and consider the factors you present, such as job loss, medical bills or disability.
Await your lender's decision. Even if a judge asks a lender to forgive a debt, it is up to the lender to do so. A lender will only forgive a debt if it sees no chance of earning the lost money back. In general, this means the lender will concede you simply have no assets or income to repay your debt.
Mortgage Loan Forgiveness
Contact your lender to request options for foreclosure alternatives. The two most common options are short sales and deed in lieu programs.
Inform your lender of your intent to take advantage of one of these options. For example, if you will be selling your home short, meaning you will offer it at a price lower than the remaining balance on your mortgage, your lender must approve the price you agree to for your sale. In a deed in lieu situation, your lender will also have to approve the process.
Determine your tax liability. When a lender forgives a loan, the IRS considers the forgiven amount a portion of your income in any given year. For example, if you sell a home short for $200,000 but owe $250,000 on your mortgage debt, the IRS may tax you on $50,000 of income if your outstanding debt is forgiven.
Consider tax relief programs. The federal government offers specific relief programs for mortgage debt forgiveness in limited periods of time. The Mortgage Forgiveness Debt Relief Act provides options through 2012.
Await a final settlement. If your debt has been forgiven and you do not qualify for tax forgiveness, you will still owe money to the IRS. If the loan balance is not forgiven despite your short sale or deed in lieu option, you will still owe the loan balance on your debt. Your lender may sue you for this remaining sum.