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What is Debt Forgiveness?

Debt forgiveness may be able to take care of credit card debt caused by frequent online shopping.
Outstanding debt is wiped out in debt forgiveness.
Some or all of a debtor's outstanding obligations can be written off in debt forgiveness.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 21 September 2014
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Debt forgiveness is the process of writing off all or a portion of a debtor’s outstanding debt. Forgiving debt may take place in order to minimize the amount of loss incurred by a lender due to defaults. The process has also been used to help bolster the economy of a nation by other countries choosing to write off debt associated with resources borrowed in years past.

Making a decision to engage in debt forgiveness can have some advantages for creditors. When authorization to forgive debt is granted, the creditor can cease expending time and resources in an attempt to collect the outstanding debt. From that point forward, those resources can be utilized for other, more productive, endeavors. In many countries, laws and regulations that have to do with credit debt allow the creditor to claim a tax deduction on all or part of the total forgiven debt. This helps to further minimize the overall loss of revenue to the creditor.

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Debtors are provided with the opportunity to be free of all or part of the debt. This can be a tremendous help when the debtor has undergone financial reversals and is no longer able to honor the debt. However, the total amount of debt forgiveness extended to the debtor may be taxed as income, depending on applicable laws. While providing temporary relief from the debt, this can mean that the debtor will be classed in a higher tax bracket for the year and have a substantial tax debt to settle after the completion of the tax year.

The act of debt forgiveness can also take place between nations. For example, a nation recovering from a natural disaster may not be in a position to pay on debts owed to other countries for several years after the disaster takes place. Rather than cripple the internal economy of the country, the creditor nations may choose to engage in a loan writeoff. It is not unusual for this to take place if there is a strong indication that the collapse of the economy of the stricken country may in turn have an adverse effect on the global economy.

Whether applied to financing situations between individuals and lenders or loans established between two or more countries, the process of debt forgiveness is not something that takes place until all possible options are explored fully. Generally, debt is not written off if there is a reasonable chance that the financial condition of the debtor will reverse in a time frame considered acceptable by the creditor. However, debt forgiveness is often the most logical and productive course of action if there are no indicators that the debtor will be able to resume paying on the debt within a reasonable amount of time.

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Discuss this Article

dilbertJ
Post 6

Lenders can forgive debt in certain situations, if a borrower reaches the best agreement. However, debt forgiveness can become a significant headache come tax time. With a personal loan, you can pay your taxes.

surfNturf
Post 4

Comfyshoes - I could not sleep at night if I owed the IRS money. I have to say that many school districts and hospitals will offer a loan forgiveness program in order to attract people in fields that experience critical shortages.

For example, in Florida there is a student debt forgiveness program which requires the student that recently graduated with a teaching degree to have their student debt absolved if they remain teaching in the public school district for a period of three years.

Many hospitals also have a similar program for nurses. At Baptist hospital, students seeking a nursing degree would be absolved of their junior and senior year loans if they agree to take on a position at Baptist Hospital upon graduation.

It is really a great program and many of the student nurses also do their clinical internship there as well. This type of forgiveness of debt makes sense because the person with the debt has to give a commitment while with the mortgage loan forgiveness program the homeowner does not.

comfyshoes
Post 3

Icecream17 - I agree but I also see that happening with credit cards. Sometimes credit card debt forgiveness is possible on debt that is about to be written off.

Many times a credit card company will sell its debt to a debt collection agency for pennies on the dollar.

They then turn around and pursue the debtor and try to get them to make a payment or settle the account.

Oh I have heard stories on the Dave Ramsey show about people who settled a $10,000 debt for $2,000. The collection agency is thrilled because they usually do not get anything and have to call a lot of people.

The few that do pay tend to make up for the many that don’t. I have also seen those commercials regarding IRS debt forgiveness, but the idea of owing the IRS money scares me.

icecream17
Post 2

Moldova - I have heard about people doing that but people that walk away from their homes like that will never get another bank to loan them any money.

Banks are very selective as it is and although you typically have to wait three years after a foreclosure in order to be able to buy another home, I think that the interest rates you would be charged would be extremely high.

There is a double edge sword with loan debt forgiveness because it looks like those that couldn’t pay their mortgage get a pass while those that do pay their mortgage religiously do not.

I think that the banks should just foreclose on the property so that people do not try to skirt their responsibilities. I don't think everyone has to own their own home.

Moldova
Post 1

I think that a debt forgiveness program has some advantages and disadvantages. For example, when dealing with mortgage debt forgiveness programs borrowers are given second chances by allowing the mortgage to be reassessed at the property’s current market value.

Sometimes the bank will also adjust the interest rate in order to make the home more affordable. The advantage for the bank is that they do not have to process a foreclosure and will get some payments for the property.

If the bank were to go through the foreclosure process not only would there be legal fees involved but by the time the bank gets around to selling the property the home might be worth even less.

According to Deutsche Bank about half of American homeowners owe more than the property is worth. The disadvantage to this system is that it punishes the best customers who pay their bills on time.

These people are not given any type of incentive and may resent the fact that others are getting these handouts when they probably could not afford the property in the first place.

Also there is a growing trend of homeowners that are going into a purposeful default meaning that since they are so underwater in their property and could afford to pay the mortgage, they choose not to because they felt that they will never recoup the money that they lost.

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