When a consumer has a large credit card debt that is being held by a debt collector, one option that may seem attractive is seeking out debt forgiveness. Debt forgiveness generally involves a consumer and a debt collector reaching a settlement under which part of a debt is forgiven.
This sounds great, right? It is important to know though that the debt forgiveness route can have its drawbacks.
For one, a credit card debt settlement with a debt collector will generally only involve a partial forgiveness of the debt, with the rest of the debt having to be repaid through either a lump sum or installment payments. Sometimes, the repayment terms might prove too onerous for a consumer, and he or she could end up back in debt trouble.
Another drawback is that the forgiven portion of the debt can expose a person to another type of bill, a tax bill. Generally, any amount of forgiven debt that goes above the amount of insolvency a person had is taxable.
Also, there can be the potential to face aggressive, harassing or unfair conduct from a debt collector in connection to efforts to seek out debt forgiveness. While one would hope collectors would always follow federal rules regarding respecting the rights of consumers and treating them fairly, this doesn’t always happen. Also, debt collector conduct that falls short of being against the law can still feel very aggressive, harassing and intimidating.
So, debt forgiveness might sometimes not provide as much relief as one would hope. This underscores how important it is for consumers to understand the likely impacts of the different debt relief options they are considering and to carefully look at all of their options.
One debt relief option some might find to have advantages over debt forgiveness is personal bankruptcy. Bankruptcy can provide some things that debt forgiveness often will not, such as:
- Full elimination of credit card debt: A Chapter 7 debt discharge could provide a route for a person to get their credit card debt completely, not just partially, erased.
- Tax-free debt elimination: Debts discharged through bankruptcy are typically not taxable.
- Protection against harassment: The bankruptcy process generally comes with the automatic stay, which prohibits collectors from taking collection actions while it is in effect.
Bankruptcy lawyers can help individuals with significant credit card debt understand if bankruptcy would fit well with their situation and debt relief goals.