5 Types of Debt Forgiveness Worth Checking Into

Americans are familiar with debt. Debt forgiveness, not so much.

Here are some scary statistics on debt:

  • College: The average student loan debt for 2015 graduates was $30,100.
  • Credit card: Balances average $16,061 per household.
  • Mortgage: $294,900 is the average home loan amount.
  • Taxes: $13,120 is the average paid in taxes by a household reporting income of $80,000.
  • Medical debt: The average American with overdue medical debt owes $1,766.

Debt forgiveness programs can help erase some of those debts for borrowers who get in over their heads and are looking for a way out.

Resolving debt doesn’t come easily, however. It can mean sticking to a budget and coming up with a payment plan, and can lead to financial disaster if not followed. Homeowners behind on their mortgage payments, for example, can lose their homes and have their credit scores ruined.

Online ads, emails and letters to your mailbox from scam artists can offer debt forgiveness help — but at a price that may seem too good to be true. Avoid them and look into the legitimate programs yourself.

Student loan debt forgiveness

There are many types of student loan debt forgiveness programs. The U.S. Department of Education offers more information, including unusual situations such as the school being closed while a student is enrolled or shortly after graduation, or a debtor becoming disabled.

Student loan forgiveness programs are programs designed to forgive all or some of the student loan.. says Robert Farrington, founder of The most popular is the Public Service Loan Forgiveness Program, Farrington says. It forgives all the student loan after 10 years (120 payments) for debtors working in public service.

Teachers in low-income areas can have part of their Perkins Loan forgiven — 15 percent in the first and second years, 20 percent in the third and fourth years, and the remaining 30 percent in the fifth year, according to Farrington.

When student debt forgiveness isn’t an option, you can refinance your student loans also.

Debt forgiveness built into repayment plan

Some student loan debt forgiveness programs include a repayment plan. Income-driven plans like the Income Based Repayment Plan (IBR) and the Pay As You Earn Repayment Plan (PAYE) forgive any remaining balance on a loan after 20 or 25 years, Farrington says. The programs allow payments of no more than 10 percent of a borrower’s discretionary income.

By extending a loan to 25 years, a student loan borrower could pay more in debt forgiveness than they would over a 10-year student loan.

Refinancing student loans is also worth considering, though it can lead to losing some protections.

Credit card debt forgiveness

Called a “debt settlement,” credit card companies will forgive debt that has become severely defaulted, says Thomas Nitzsche, a credit counselor and spokesman for Clearpoint Credit Counseling Solutions.

Once the original bank has charged the debt off to a third party collection agency, the collector may be willing to settle for less than the full balance. This is particularly true as the debt reaches the debtor’s state’s statute of limitations on debt” of three to 10 years.
Thomas Nitzsche

His organization doesn’t recommend using debt settlement because it can damage credit and the forgiven debt may be taxable.

Debt settlement can’t be used with a secured debt, such as a mortgage or car loan. Qualifying for debt settlement can be easy. You’ll have to prove to creditors that you can’t afford to make your payments and that a settlement is in their best interest. A debt settlement company can negotiate for you and make the process easier.

Super Money offers reviews of debt settlement companies here.

Payment plans

Some creditors are willing to work with people on payment plans or reduce the amount owed if some form of payment is made, says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network.

Others may offer plans if you had a true temporary hardship. You lost your job but now have a new one, and previously paid your bills on time.
Kevin Gallegos

Chapter 7 bankruptcy

Another way to deal with credit card debt that you can’t pay is to file for Chapter 7 bankruptcy. If your wages are garnished to pay a credit card judgment, bankruptcy can end it and erase your debts.

Bankruptcy also doesn’t lead to a higher tax bill, and it can help poor credit scores rebound faster.

Filing for bankruptcy can cost up to $2,500, while a debt settlement can be cheaper if your balance isn’t too high. Debt settlement firms charge fees of around 20 percent, which are collected only after your debt account has been settled.

Mortgage debt forgiveness

There are many ways that lenders deal with homeowners who don’t pay their mortgage. Foreclosures, short sales and loan modifications are some ways banks deal with unpaid mortgage debt.

One program helps homeowners who are underwater on a home loan — meaning they owe more on the loan than their home is worth. It doesn’t forgive mortgage debt, but allow it to be refinanced at a better loan rate.

The Home Affordable Refinance program (HARP) has been around since 2009 and will end in September 2017. It was designed to help underwater and low-equity homeowners who saw their home values drop after the housing market crash of 2008 and who may have had an adjustable rate mortgage that escalated after one year.

HARP allows homeowners to refinance their Fannie Mae or Freddie Mac loans, provided they aren’t late on mortgage payments and don’t have other ways to refinance.

Short sale and foreclosure

A short sale can be used when a borrower can’t afford to keep or doesn’t want to keep the property, and there isn’t enough equity to pay the full amount owed the lender and pay the selling costs, Nitzsche says. It’s commonly called being “upside down.”

It can only be done if the lender agrees to take less than the full amount owed to allow the borrower to get out from under the debt obligation and to avoid the cost of a foreclosure, which may end up as a larger loss to the lender, he says.

Deed in lieu of foreclosure

Generally referred to as a deed in lieu, this type of debt forgiveness on a mortgage doesn’t involve the sale of a house, Nitzsche says.

“The lender is agreeing to take back the property as payment in full of the debt. A lender may require that the house be listed for a short sale for a certain period of time before accepting a deed in lieu.Thomas Nitzsche

The first lender generally will not take the property back if there’s a second loan on the property, Nitzsche says. If there’s a second loan, that lender must be willing to remove the lien on the property or possibly convert the secured lien to an unsecured lien.

With a short sale, deed in lieu or foreclosure, all or a part of the debt being forgiven may not be guaranteed, Nitzsche warns. It may depend on who owns the loan, the type of loan, how the loan is written, state laws and other factors, he says. The help of a housing counselor and lawyer may be needed.

Special programs for mortgage debt forgiveness

Some states that hit the hardest by mortgage foreclosures have received federal money to prevent foreclosures, Nitzsche says.

The Keep Your Home California program, for example, allows loan forgiveness if the homeowner remains in the home for a period of time.

Medical debt forgiveness

About 42.9 million U.S. residents have outstanding medical debt, owing an average of $1,766, according to a report by the Consumer Financial Protection Bureau. Half of them showed no other signs of financial distress, the report found.

Consumers can seek need-based “financial aid” from their medical provider by filling out a financial questionnaire with the billing department, Nitzsche says.

“It’s important to apply for this aid before the debt is sold to a third party collection agency, as it will no longer be available once it is in collections,” he says.

“This type of debt forgiveness is often combined with a zero percent repayment plan on the adjusted balance,” he says. “However, sometimes the entire balance is forgiven.”

Finding help

Don’t let debt ruin your life. Seek help through the methods listed above and by checking into the debt settlement companies that Super Money has reviewed.

Finding debt relief will take some work, but in the end your financial life and credit score will be better off for it.