What is debt forgiveness?

Despite government efforts to implement one-time student loan forgiveness of up to $20,000 to Pell Grant recipients and $10,000 to non-Pell Grant recipients, student debt relief has been put on hold. Currently, applications are not being accepted as the court has issued a block on the student debt relief program.

If this program does go through, student loan relief will not be taxed at the federal level. However, some states might require you to pay taxes on debt relief — you’ll need to check with your state. Student loan repayments have been on hold since the start of the pandemic and will likely resume in the summer of 2023.

If you’re employed by the U.S. government or a nonprofit organization, you can also look into the Public Service Loan Forgiveness (PSLF) Program. If you work as a teacher, you might find relief through the Teacher Loan Forgiveness Program .

Over 100 million people in America carry medical debt. In a 2022 report, the Consumer Financial Protection Bureau (CFPB) reported that 58% of debt in collections is medical debt.

To avoid having your medical debt go to collections, the best thing you can do is deal with it as soon as possible. Reach out to your hospital or health care provider directly to see if there are debt relief options available or if you can set up a payment plan.

Medical debt forgiveness varies from state to state. Some states, such as Oregon and Texas, require certain nonprofit or state-owned hospitals to provide financial assistance to patients who meet income requirements. Other states provide special assistance programs that pay the cost of care for eligible patients. And some states have no mandated financial assistance programs, but individual hospitals implement their own financial assistance policies.

» MORE: Does medical debt affect your credit score?

While the chances of your credit card issuer forgiving your total balance are slim to none, you can try to negotiate to make your debt more manageable. To do this, reach out to your issuer directly. The earlier you can do this, the better.

Explain why you’re unable to manage your payments. Is there an extenuating circumstance (e.g., job loss, medical issue, divorce, etc.) preventing you from being able to pay? Many credit card companies offer hardship programs that allow you to temporarily lower your interest rate or waive fees for a period of time. If your issuer is willing to negotiate, you can try proposing a payment plan you can realistically afford.

During the Great Recession of 2007 to 2009, there was also a nationwide foreclosure crisis. Some estimate this crisis lasted nearly a decade, with as many as 10 million borrowers losing their homes.

The Mortgage Forgiveness Debt Relief Act was released in 2007 through 2017, allowing taxpayers to exclude income from the discharge of debt on their principal residence (up to $2 million). This included debt relief through mortgage restructuring as well as mortgage debt forgiven during foreclosure.

In December 2020, the Consolidated Appropriations Act was passed in response to the pandemic. It extended the exclusion for canceled mortgage debt through the end of 2025. This exclusion is for qualifying residents up to $750,000.

The government also offers a number of loss mitigation programs to assist Federal Housing Administration (FHA) insured homeowners facing financial hardships. This includes programs like a forbearance plan that allows borrowers to work with their mortgage lenders to temporarily pause or reduce their monthly payments or negotiate specific repayment terms.

» MORE: What is preforeclosure?

If you have tax debt, you can apply for an offer in compromise. This program allows you to settle your tax debt with the IRS for less than the full amount you owe. Acceptance in this program depends on factors such as your income, expenses, asset equity and ability to pay.

Offers are typically accepted when the amount you propose represents the most that the IRS can expect to collect within a reasonable period of time. There is a $205 application fee; however, if you apply and aren’t eligible, the fee will be returned with your application.

Debt settlement companies negotiate with creditors on your behalf. If the company is successful (which is not guaranteed), you will have to pay a lump sum to your creditors.

Debt settlement companies often advise you to stop paying your debt while it tries to negotiate a settlement. Unfortunately, this can negatively impact your credit score. If the debt settlement company is unable to negotiate a settlement, you can end up on the hook for missed payments. Not only will you have to pay your original balance, you may also owe the debt settlement company a high fee.

Credit counseling companies are often nonprofit organizations and can advise you on how to manage your money and deal with your debts. Typically you can access free educational materials and workshops.

A credit counselor can help you negotiate with your creditors to prevent your debts from going to collections. However, if you’re looking to reduce the amount of your debt, credit counselors don’t normally do this.

Debt consolidation is the process of rolling up several separate debts and paying them off with one loan or monthly payment. You can consolidate debt using a debt consolidation loan or a balance transfer credit card .

The benefit of debt consolidation is it can simplify debt repayment and possibly lower your monthly payment if you secure a low interest rate. However, debt consolidation will not eliminate any of your debt, and if you have a poor credit score you might find it difficult to secure a loan or a balance transfer credit card.

Bankruptcy is typically a last resort for people struggling with debt, yet it can provide a fresh financial start. While filing for bankruptcy can help to eliminate many unsecured debts, including credit card and medical debt, not all of your debts are eliminated. You also will likely have to part with some of your assets as a way of repaying some of your debts.

ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:

1. Kaiser Health News, " 100 Million People in America Are Saddled With Health Care Debt .” Accessed March 25, 2023.
2. Consumer Financial Protection Bureau, " Medical debt burden in the United States. " Accessed March 24, 2023.
3. National Consumer Law Center, " An ounce of prevention. " Accessed March 24, 2023.
4. Federal Reserve Bank of St. Louis, " The end is in sight for the U.S. Foreclosure Crisis, " Accessed March 24, 2023.
5. IRS, " Home foreclosure and debt cancellation. " Accessed March 24, 2023.
6. IRS, “ Topic No. 431, Canceled Debt – Is It Taxable or Not? ” Accessed April 7, 2023.
7. IRS, “ Offer in Compromise .” Accessed April 7, 2023.
8. Federal Student Aid, “ Teacher Loan Forgiveness .” Accessed April 7, 2023.
9. Federal Student Aide, “ Public Service Loan Forgiveness (PSLF) .” Accessed April 7, 2023.
10. WSJ, “ When Will Student Loan Payments Resume? ” Accessed April 7, 2023.