What are the pros and cons of credit card debt forgiveness? (2024)

FAQs

What are the cons of debt forgiveness? ›

Downsides of debt forgiveness

However, there are some negative repercussions to consider: Debt forgiveness may negatively affect credit scores, making it challenging to obtain future loans or credit. Forgiven debt of more than $600 may be considered taxable income, potentially resulting in a hefty tax bill.

Unfortunately, there is no such thing as a government-sponsored program for credit card debt relief. In fact, if you receive a solicitation that touts a government program to get you out of debt, you may want to think twice about working with that company.

If you're one of the millions of Americans struggling to repay high-interest debt, a debt relief plan may be an option to help you get your finances on track. But it's not a quick fix. It's a long-term solution designed to help you get out of debt over a period of time — typically several years.

While credit card debt forgiveness can help you recover from difficult financial situations, it might not be worth damaging your credit for several years if you can instead find alternative debt help. "Debt settlement isn't worth it if you can reasonably afford to manage your financial situation in any other way.

With debt settlement and charge-offs, for instance, the derogatory mark will typically remain on your credit reports for seven years from your original delinquency date. With bankruptcy, the public record will stay on your credit reports for up to 10 years.

No, there aren't any government programs to help you pay off credit card debt. The CARD Act does place restrictions on credit card companies that make it easier to pay off credit cards, and the bankruptcy process can get rid of credit card debt, but the government doesn't normally assist with managing credit card debt.

Outside of bankruptcy or debt settlement, there are really no other ways to completely wipe away credit card debt without paying. Making minimum payments and slowly chipping away at the balance is the norm for most people in debt, and that may be the best option in many situations.

Debt settlement can eliminate outstanding obligations, but it can negatively impact your credit score. Stronger credit scores may be more significantly impacted by a debt settlement. The best type of debt to settle is a single large obligation that is one to three years past due.

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There is a high probability that you will be affected for a couple of months or even years after settling your debts. However, a debt settlement does not mean that your life needs to stop. You can begin rebuilding your credit score little by little. Your credit score will usually take between 6-24 months to improve.

Generally, experts recommend other debt help options first. But if you decide that debt settlement is right for you, consider National Debt Relief, New Era Debt Solutions, and Freedom Debt Relief first since these companies have the highest customer satisfaction scores.

Debt relief through a debt management plan

A debt management plan allows you to pay your unsecured debts — typically credit cards — in full, but often at a reduced interest rate or with fees waived. You make a single payment each month to a credit counseling agency, which distributes it among your creditors.

National Debt Relief's program is a great choice for people with high levels of unsecured debt who are struggling with financial hardship, like a divorce or job loss. If you're barely keeping up with your minimum payments and the balances on your accounts keep growing, then our program may be right for you.

Cons of debt settlement

Creditors are not legally required to settle for less than you owe. Stopping payments on your bills (as most debt relief companies suggest) will damage your credit score. Debt settlement companies can charge fees.

The rapid inflation in the cost of college is, in large part, due to rampant government subsidies in higher education. Forgiving student loans only makes that problem worse.

Interest and fees continue to accrue: Until you enter a settlement agreement, you'll accrue additional interest and late fees on your debt. If you don't stick with the program to completion or if National can't negotiate a settlement, you may end up with a higher balance.

This can make it harder to rent an apartment or even get good car insurance rates. Living debt-free can sometimes result in being overly cautious with money. Avoiding all debt means you might miss out on investment or business opportunities that require upfront capital.