By Tim Maxwell
Edited by Michelle TipswordWhat Is Debt Forgiveness?
Quick Answer
Debt forgiveness is when a lender forgives some or all of your outstanding balance on a loan, credit card, tax debt or another account. While it can help you pay down and even eliminate debt, there are risks you must consider first.
Let's face it, after several years of higher prices, money doesn't go as far as it used to. About 67% of Americans say they're living paycheck to paycheck, according to a 2025 PNC Bank study, which makes it hard to pay down debt. That's especially true if you're carrying a large debt balance. Experian data found that the average consumer now carries about $105,000 in total debt.
Consolidation loans, debt management plans and repayment strategies are some methods you can use to reduce your debt. But if you're experiencing a major financial hardship and you've exhausted other options, you might take a look at debt forgiveness. Debt forgiveness is when a lender forgives all or some of your outstanding balance on a loan or other credit account to help relieve your debt. Here's what you need to know.
How Does Debt Forgiveness Work?
Debt forgiveness is when a lender agrees to wipe out some or all of your account balance. It's a strategy some people use to reduce debts such as credit cards, personal loans and student loans. Secured debts like home and car loans usually don't qualify, since the lender can recover losses by seizing the collateral through foreclosure or repossession.
There are several ways to get debt forgiveness. You can work with creditors directly or through a nonprofit credit counselor to try to get them to lower your total balance owed. These counselors can also help you review your budget and explain whether forgiveness, settlement or a debt management plan are good options for you.
Others work through a debt settlement company and pay a fee for the service. This can be a risky option because these companies often want you to stop payments, which can lead to late fees, penalties and collections—all of which negatively impact your credit. Instead of paying your creditors, you send funds to a separate account managed by a third party while the company negotiates on your behalf.
Debt forgiveness isn't always successful, but when it works, you could end up with a zero balance or one that is significantly lower than what you owe. There are downsides to consider, however, which we'll explore in a moment.
Tip: If your creditor agrees to reduce or fully forgive your balance, ask them for a debt forgiveness letter. This letter confirms you no longer owe the full balance and documents your agreement. Keep it in a safe place because it could protect you against any future collection attempts.
Learn more: How Does Debt Relief Work?
What's the Difference Between Debt Forgiveness and Debt Settlement?
Debt forgiveness and debt settlement both reduce what you owe, but they differ in how they work and affect your credit.
Debt Forgiveness
Debt forgiveness occurs when your lender forgives some or all of your outstanding balance on a loan or credit account. You can contact lenders directly, through a nonprofit counseling agency or as part of a hardship or relief program. Forgiven debt may appear on credit reports as "settled" or "settled for less than full balance," which could impact your credit score.
Debt Settlement
Debt settlement is a negotiation with your creditors to pay less than the full amount you owe, usually through a debt settlement company. Generally, you'll settle the agreed-upon amount by making a lump-sum payment. It's a last-resort option that may make sense if you've fallen behind on your payments and want an alternative to bankruptcy.
Debt settlement can have a negative effect on your credit, but those who consider it might already have a lower credit score if they have late payments, defaults and collections.
Note: If any portion of your debt is canceled or settled, the IRS could consider that amount taxable income. You may receive a 1099-C if the forgiven amount is over $600, but you'll need to report the forgiven amount even if you don't receive the form.
| Debt Forgiveness | Debt Settlement | |
|---|---|---|
| Purpose | Reduce or eliminate part of your balance through a lender-approved hardship or forgiveness program | Settle a debt for less than you owe through a negotiated agreement |
| Process | Ask the creditor directly, request help through a nonprofit credit counselor or apply to a program that forgives part of the debt | Negotiate with your creditors yourself to pay a reduced amount instead of the full balance; alternatively, using a debt settlement company typically involves stopping payments to creditors to give you negotiation leverage for a settlement |
| Types of debt covered | Unsecured debts like credit cards, personal loans and student loans | Unsecured debts such as credit cards, personal loans and medical bills |
| Credit impact | Forgiveness of loan and credit card debt could slightly affect your credit by paying off and closing the loan, or severely affect it if forgiveness results from bankruptcy, charge-offs or debt settlement | Missed payments, defaults or collections could severely harm your credit score; the action may be reported as "settled" or "paid off for less than the full balance" |
| Intended for | People facing financial hardship who qualify for a program or can work directly with a creditor to modify or reduce what they owe | Those who are behind on payments, don't qualify for other options and want to avoid bankruptcy |
Different Types of Debt Forgiveness
If you're finding it difficult to keep up with your bills, it's good to know there are several types of debt forgiveness that could give you relief. Here are some of the most common methods.
Student Loan Forgiveness
Federal student loan forgiveness programs are one of the only ways to clear a debt without consequences. These programs apply only to federal student loans and often have strict eligibility rules. Private student loans do not qualify for forgiveness programs.
The most well-known option is Public Service Loan Forgiveness (PSLF), which wipes out remaining federal loan balances after you work full time for an eligible employer and make payments for 10 years. If you qualify for an income-driven repayment (IDR) plan—which reduces your monthly payment based on your income—you may also have your remaining balance forgiven after making payments for 20 or 25 years.
To find out more about your student loan forgiveness options, check out the guide provided by the U.S. Department of Education or contact your loan servicer.
| Pros | Cons |
|---|---|
| Discharges up to 100% of your federal student debt | Eligibility rules can be strict and hard to maintain. Some programs require annual certifications or documented payments. |
| Income-driven repayment reduces payments based on your income and forgives the remaining balance after 20 or 25 years of repayment. Public Service Loan Forgiveness can clear your balance in 10 years. | May lock you into your job. Some programs require years in a specific career or type of employer. Switching careers could cause you to lose eligibility. |
| Many programs aren't subject to federal taxes in 2025 | Protections to keep student loan forgiveness in place expire at the end of 2025. Forgiven debts could be taxable in 2026 unless Congress extends the protection. |
Learn more: Will My Student Loan Debt Forgiveness Be Taxed?
Medical Debt Forgiveness
Medical debt can add up quickly if you suffer an unexpected injury or illness that requires expensive treatment. If you don't have insurance or your benefits don't cover your treatment, coming up with the funds to cover your medical bills can be challenging. If you're in this situation, it's worth exploring medical debt relief programs offered through some hospitals.
Federal law requires all nonprofit hospitals to have a financial assistance policy that provides free or discounted care for all emergency and other necessary care and to widely publicize eligibility criteria for such assistance. That means any nonprofit hospital you owe may be able to provide you with debt relief.
More than half of all U.S. hospitals offer some form of medical debt relief, according to patient services advocate group Dollar For, not just nonprofit ones. These programs, often called charity care, reduce or even eliminate medical bills for qualified patients.
Eligibility usually depends on income, household size and the size or age of the bill. Some hospitals consider your insurance status and where you live. Because eligibility criteria varies, it's wise to check with the hospital's billing office to see whether you qualify.
| Pros | Cons |
|---|---|
| May lower or eliminate your medical bills if you're eligible | Forgiven debt is generally taxable, and you may receive a 1099-C for amounts over $600 |
| Widely available at over 50% of U.S. hospitals | Must provide proof of income |
| Even if you don't receive full debt forgiveness, you may be eligible for financial assistance | Eligibility requirements can be strict |
Tax Debt Forgiveness
If you have significant tax debt, the IRS may provide relief. Eligibility requires you to be fully caught up on your tax filings and current on your estimated taxes. If you qualify, you may file an Offer in Compromise, which allows you to make a tax settlement offer for less than you owe on your total tax bill.
With an Offer in Compromise, the IRS reviews your income and necessary expenses and your future earning potential. If they determine you're facing economic hardship and your offer is the most they can expect to recover from you, they may approve your offer. If you don't qualify for forgiveness, they may approve an installment plan to pay down your debt over time.
| Pros | Cons |
|---|---|
| May lower your total tax bill | Strict eligibility requirements |
| Can pause collections or remove penalties | Approval rates are low |
| May receive relief from joint tax liability if tax debt was caused by your spouse and you had no knowledge of it | Can't apply for forgiveness if filing for bankruptcy |
Tip: Use the IRS' interactive Offer in Compromise Pre-Qualifier Tool to help determine your eligibility for tax relief.
Other Types of Debt Reduction
The following types of debt payment do not typically forgive your debt, but they may offer some relief if you can't pay your bills.
Mortgage Debt Modification
Mortgage debt forgiveness was more common during the housing crisis than it is today. Still, if you're struggling to make your mortgage payments, your lender may take your hardship under consideration and agree to a mortgage modification.
If you can show you can afford the monthly payments, your lender may adjust the terms of your contract by extending the loan term, lowering your interest rate or, in rare cases, reducing your outstanding principal balance. That lowers your monthly payments and helps you avoid foreclosure, which benefits both you and the lender.
| Pros | Cons |
|---|---|
| Available through many lenders and FHA programs | Full mortgage forgiveness is extremely rare |
| May reduce your interest rate or extend your loan term to lower your monthly mortgage payment; could include some principal reduction in limited cases | Eligibility typically requires documentation of hardship |
| Helps you avoid foreclosure and stay in your home | May need to meet minimum credit score requirements; contact your lender right away if you start struggling with payments |
Credit Card Debt Settlement
If you find yourself severely behind on your credit card bills, negotiating a debt settlement may be a way to clear your outstanding debt—but not without consequence. Debt settlement is not debt forgiveness. Rather, it's a process in which you negotiate with your creditor to pay back less than what you owe through a third-party debt settlement company.
This option might sound good, but it can hurt your credit score and can cost you in time and fees. Some debt settlement companies have you stop making payments while they negotiate, which can cause you to rack up missed payments and late fees, not to mention severely damage your credit.
Once the debt settlement company reaches an agreement with your creditor—and it's possible they never will—your credit score will probably be in bad shape and you'll still owe the settlement company a fee for their service. This is a last resort option, reserved for people who can see no other way to get out from under their debt.
| Pros | Cons |
|---|---|
| Could reduce your debt balance | Doesn't forgive the debt. Instead, a third party negotiates to lower your account balances, but that isn't always successful. |
| May offer temporary payment relief when you stop payments. That frees up money in the short term, and you may have three to four years to save toward the settlement amount. | Very harmful to credit scores, primarily due to missed payments and a negative "settled" mark that could stay on your credit report for up to seven years |
| May be only option if other options (debt consolidation, balance transfer credit cards, debt forgiveness) aren't possible | Typically requires a fee to the third party, which could offset some or all of the savings from debt settlement |
| May help you avoid bankruptcy if you've missed several payments | Not all creditors work with debt settlement companies |
Learn more: Alternatives to Debt Settlement
Is Debt Forgiveness Right for Me?
Debt forgiveness may be right for you if you are experiencing a financial hardship that makes it nearly impossible to pay down your debt balances. If you have large unsecured debts, such as credit cards, medical bills or federal student loans or taxes, it may be worth pursuing.
It's generally wise to consider forgiveness only after you've exhausted other alternatives like debt consolidation loans, balance transfer credit cards and credit counseling. But if you're unable to keep up with your bills and debt forgiveness or settlement is your last option to gain control over your debt and avoid bankruptcy, then it may be right for you.
On the other hand, debt forgiveness may not suit you if you are able to secure reduced monthly payments simply by asking your creditors for a lower interest rate. It's also a bad option if you want to avoid credit damage from relief that relies on debt settlement. Debt forgiveness or settlement may not even be an option for your secured debts like car loans and mortgages, since they typically are ineligible for such relief.
Other Debt Relief Options
Since debt forgiveness is getting harder to find and debt settlement programs are a last-resort option, it's worthwhile to explore your other options, including:
- Credit counseling: An accredited nonprofit counselor reviews your income and debts and explains your options to you, often for free. They can help you craft a workable budget that pays down your debt, possibly through a debt management plan.
- Debt management plan: With a DMP, you make one monthly payment to the credit counseling agency. Those funds are then distributed to creditors of your unsecured debts, such as credit cards and installment loans. The agency works with your creditors to reduce interest rates or waive fees, but some creditors may refuse such concessions. When approved, the lower borrowing costs can help your payments go farther to pay down your debts.
- Debt consolidation loan: A debt consolidation loan combines your eligible debts into one new loan. It can help you pay down debt if you're able to secure a loan rate that's lower than the average rate of the accounts you're consolidating. However, you must refrain from racking up debt on those newly cleared accounts or your debt could grow even higher.
- Balance transfer credit cards: Many credit card issuers offer balance transfer credit cards that allow you to transfer your debts from other cards. These cards often offer a 0% interest introductory period of up to 21 months. That gives you plenty of time to eliminate or significantly reduce your balance while making interest-free payments.
- Bankruptcy: For some people facing insurmountable debt, bankruptcy may be the only way to stop collection proceedings and legally resolve their debts. Of course, it comes with severe long-term credit consequences, so it should only be considered after you've exhausted all your options.
Frequently Asked Questions
Check Your Credit to Understand Your Options
Before pursuing debt forgiveness, it's a good idea to check your credit report and score to see where you stand. Experian gives you access to your Experian credit report and FICO® ScoreΘ for free. Reviewing your credit score and understanding your creditworthiness could help you determine what options you may qualify for. You can also spot issues you can improve upon to strengthen your credit.
Find out what debts you owe
Your free credit report lists all your debts, such as credit card balances and loans, helping you create a plan to tackle your debt and improve your financial health.
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About the author
Tim Maxwell
Tim Maxwell is a former television news journalist turned personal finance writer and credit card expert with over two decades of media experience. His work has been published in Bankrate, Fox Business, Washington Post, USA Today, The Balance, MarketWatch and others. He is also the founder of the personal finance website Incomist.
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