Reasons for Debt Forgiveness

Debt forgiveness is the cancellation of your legal debt. You are not legally responsible for debt that has been forgiven by your creditor, and the creditor cannot take action against you for non-payment. Although a variety of situations can lead to debt forgiveness, the decision is primarily influenced by your creditor's policies.

Financial Hardship

Some creditors are willing to negotiate with you when you are experiencing financial hardship, such as a serious medical illness suffered by you or a family member, or loss of income. In such circumstances, creditors will occasionally accept partial settlement amounts or reduce your debt balance, forgiving the rest. The IRS, for example, allows taxpayers who are experiencing financial difficulty to make an offer in compromise. An offer in compromise is an offer by the taxpayer to pay an amount less than the total due, with the IRS waiving the rest of the balance.

Loss of Employment

The loss of your job is a factor that can be taken into consideration by some of your creditors, even if you have savings in the bank or other assets. Credit card companies sometimes offer specific settlement and debt forgiveness programs for account holders who become unemployed. Federal and state creditors, including student loan programs and child support agencies, can make arrangements for persons who lose their jobs through no faults of their own.

Lender Arrangement

Two types of arrangements can be made with mortgage lenders that result in debt forgiveness. The balance on a mortgage you cannot pay is forgiven through a successful short sale. A short sale is when you sell your home for a smaller amount than what you owe the lender. The lender, in turn, forgives the rest of the debt. A deed-in-lieu of foreclosure, when you sign ownership of the home back to the lender, frees you from liability for the balance of the mortgage.

Permanent Disability or Death

Permanent disability or death results in the forgiveness of some debts. Federal student loans are forgiven in full if you die or become permanently and completely disabled after you received the money. Some or all of your credit card debt may be forgiven in the event of your death or total disability, depending on creditor policies and the enforceability of your debt.