Get Out of Debt

Debt Forgiveness: Understanding Options and Consequences

Debt is a pervasive state for many Americans. In fact, the average American has over $90,000 in debt. Just look over some of these alarming statistics on debt to get a complete picture:

  • Student debt: The average student loan debt for the Class of 2019 graduates was $28,950.
  • Credit card: Balances on credit cards average $6,194 for every American.
  • Mortgage: The average mortgage debt for homeowners is $208,185.
  • Taxes: $15,322 is the average amount paid in federal taxes for all Americans in 2018.
  • Medical debt: 32% of Americans have some form of medical debt.

The odds are likely that you belong to this group of people with debt as well. So what are your options to combat this?

There are multiple debt forgiveness programs available, but many people don’t know about them, which is unfortunate given how much debt there is.

9 debt forgiveness options to consider

We’ve compiled a list of the various kinds of options with a brief overview. Skim through them and click the link at the end of each summary to view our more in-depth analysis of these programs.

Student loan forgiveness

Student debt is the second largest form of debt behind mortgages. Not surprisingly, there are several student loan debt forgiveness programs out there. When you’re shopping around, there are many considerations to take into account.

According to Robert Farrington, founder of, student loan forgiveness programs are designed to forgive all or some of the student loan. He lists the most popular one as the Public Service Loan Forgiveness Program. It forgives all student loans 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. While this is a far cry from total student loan cancelation, it can be a big help for those who are eligible.

While the common refrain is that student loan forgiveness is for those in public service with federal student debt, in reality, others can be eligible as well. The U.S. Department of Education has a guide on its website to cover program eligibility for forgiving federal student loans, including unique situations like borrowers having a school closed while they are still enrolled.

Student Loan Alternatives

Even if you don’t find yourself on this list, you aren’t without options. Refinancing your student loans can be another way to find some debt relief. You can find more information on refinancing student loans with our step-by-step guide. And read through our analysis to learn more about student loan forgiveness.

Repayment plans

Some 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) offer loan forgiveness for any remaining balance after 20 or 25 years, Farrington says.

These 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.

Credit card debt forgiveness

Also called a “debt settlement,” credit card debt forgiveness is a program specifically for credit card debtors. Thomas Nitzsche, a credit counselor and spokesman for Clearpoint Credit Counseling Solutions, explains that in this scenario, a credit card company forgives a debt that has become severely defaulted.

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 pursuing a settlement because it can damage credit, and the forgiven debt has tax consequences.

Debt settlement can’t be used with secured debt, such as a mortgage or a car loan. Instead, unsecured debt that isn’t tied to collateral, like medical bills and credit card debt, can be settled with creditors.

Qualifying for debt settlement is not always easy and relies on the willingness of your creditor. 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. Because of how debt settlement works, you might also see a plunging credit score on your credit report before things get better.

If you’re unsure how to proceed, enlist an expert. A debt settlement company can negotiate on your behalf but may saddle you with heavy fees if you’re not careful. We have a simple tool to review and compare popular debt settlement companies that you can find here.

Find out more about the benefits and dangers of debt settlement with our comprehensive guide.

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

While your creditors are under no obligation to do this for you, they can be motivated to at least consider it to partially recoup some of the money owed to them. This is always a great initial step if you’re considering something more drastic.

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 erase your debt. Bankruptcy also doesn’t lead to a higher tax bill, and it can help poor credit scores rebound faster than staying in debt. Chapter 13 bankruptcy is another popular option for individuals.

But bankruptcy doesn’t come without a cost. It is the last resort for those who need it, as the ramifications are burdensome and long term. You could see negative effects on your credit report that can take years to improve.

Filing for bankruptcy is also expensive at $2,500 to apply, while a debt settlement plan can be cheaper as long as 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.

Read up on all of the information about what Chapter 7 bankruptcy entails with our guide, including navigating the process and what alternatives are available.

Mortgage debt forgiveness

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

The mortgage debt forgiveness program helps homeowners underwater on a home loan — meaning they owe more on the loan than their home is worth. This program doesn’t totally forgive mortgage debt, but it allows it to be refinanced at a better loan rate.

One such example was the Home Affordable Modification Program (HAMP), which started in 2009 and expired in 2016 in response to the housing market crash of 2008. It was designed to help struggling and low-equity homeowners who had financial hardships and needed modified repayment plans and a lower interest rate.

The Mortgage Forgiveness Debt Relief Act is another example of legislation that has offered mortgage relief through tax bills and has been extended to 2025. While it doesn’t relieve the actual mortgage itself, this relief bill has helped people who lost their properties by removing them from other taxable income.

You can find out more about mortgage debt forgiveness by reading our article all about it.

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 that is owed to the lender while paying the selling costs, Nitzsche says. It’s commonly called being “upside down.”

This tactic 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. It may have tough consequences for the lender by ending up as a bigger loss, he says.

Deed in lieu of foreclosure

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

“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 is a second loan on the property, Nitzsche says. When there is 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.

Nitzsche warns that with a short sale, deed in lieu, or foreclosure, all or a part of the debt being forgiven is not guaranteed. It depends on who owns the loan, what type of loan it is, and how the loan is written, along with state laws and other factors. The help of a housing counselor and lawyer may be needed here.

Medical debt forgiveness

According to a report, 32% of Americans are suffering from medical debt. Among those people, 28% have at least $10,000 or more debt.

According to Nitzsche, consumers can seek need-based financial aid from their medical provider by filling out a financial questionnaire with the billing department.

“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.

He also explained that “[t]his type of debt forgiveness is often combined with a zero percent repayment plan on the adjusted balance. However, sometimes the entire balance is forgiven.”

If you’re looking for more details about forgiveness for your medical debts, you can review our guide on how to settle a medical debt.

How does debt forgiveness work?

These programs help erase debts for borrowers who get in over their heads and search for a way out. While these programs can seem enticing, they are not quick-fix options. They require creating a budget or plan and sticking to it.

There are also many scam artists claiming to wipe debt away via online ads or emails, with seemingly no downside – that is, until you read the small print. You could somehow end up paying more with these long-term loans that promise debt forgiveness in a certain number of years.

How do you qualify for debt forgiveness?

There are many different programs out there, depending on the type of debt you hope to absolve. Different eligibility requirements factor in for each, so it’s important to research the program before pursuing it.

Does debt forgiveness hurt your credit?

Some programs hurt your credit, such as debt settlement, because you are not making your payments on time before entering negotiations. On the other hand, some have no effect at all.

Finding help

If you’re not finding a solution for your debts with forgiveness programs, there are still other ways to find relief. Explore alternative options like enlisting a credit counseling agency that could help you to be more knowledgeable about personal finance and put together a debt management plan for your payments.

Debt doesn’t have to ruin your life. You can read more information and get all of the facts for every debt management program listed using our guides linked at the bottom of the summaries.

Finding debt relief takes some serious leg work, but the results — an improved financial life and credit score — are worth it.