Do You Qualify For Debt Forgiveness? Your Options Explained
Every lender (and type of loan) has unique rules about debt forgiveness. Federal student loans can take years to be forgiven — if you qualify at all. But you could have credit card debt forgiven with a simple call to your card company.
Learn what types of debt can be forgiven, whether you’re eligible and what you can do if you’re not.
- Debt forgiveness doesn’t always mean your debt is going away. It could just mean that your payments are paused.
- Most types of loans have some sort of forgiveness or financial hardship program. Whether you’re eligible will depend on the loan, and in some cases, the lender.
- Forgiven debt is usually taxed as regular income.
- Debt forgiveness can be hard to qualify for — an alternative like a debt management plan might make more sense.
What is debt forgiveness?
Debt forgiveness isn’t magic: It doesn’t erase everything you owe. In some cases, your debt itself might stay the same and instead you’ll get extra time to pay. These are sometimes also called financial hardship programs.
If a lender offers debt forgiveness, it typically does so in a few different ways.
- Cancellation: A portion of your loan is canceled, or forgiven
- Deferment or forbearance: Your lender temporarily pauses your payments to give you time to catch up (interest continues to accrue)
- Modified loan terms: Your lender lowers your monthly payment by extending your loan repayment term (but you’ll pay more interest over time)
Types of debt forgiveness explained
You can get a portion of your federal student loans forgiven in some instances, but it isn’t easy.
Forgiveness programs
There are a few student loan forgiveness programs out there, but only some people qualify. Each will depend on the kind of work you do and how long you’ve been making payments.
Public Service Loan Forgiveness (PSLF): This program requires that you work for the government, a nonprofit organization or another eligible employer. You can only qualify after you’ve made 120 (or 10 years’ worth of) qualifying payments.
– Quick tip: See if you work for an eligible employer by using the U.S. Department of Education’s PSLF tool.
Teacher Loan Forgiveness (TLF): You could get up to $17,500 of your Direct student loans forgiven after teaching for five years at a low-income school with TLF.
Perkins Loan Cancellation: Perkins Loans haven’t been available since 2017. If you’re paying on an old Perkins Loan, you could have some or all of your balance forgiven if you’re a teacher, police officer, public defender or work in another eligible public service role.
Income-driven repayment (IDR) plans
IDR plans personalize your federal student loan bill, based on your income and family size. After you complete your IDR (which can take 20 or 25 years, depending on the plan), your remaining loan balance will be forgiven.
– Changing policy: The SAVE (Save on a Valuable Education) plan is no longer available for new borrowers. Stay on top of shifting student loan forgiveness news with these U.S. Department of Education announcements.
The federal government has offered mortgage debt forgiveness during unprecedented times (like the 2007 housing crisis and COVID), but many have expired or are set to expire at the end of 2025.
You still may be able to lower your monthly payments through:
Loan modification: Permanently changes the terms of your mortgage to make your payments easier to afford or avoid foreclosure
Mortgage forbearance: Pauses or lowers your monthly payments for a set amount of time
Mortgage refinance: Exchanges your current mortgage with a new one
And if your back is against the wall, you could turn to a short sale. This is when you sell your house for less than it’s worth — your mortgage lender may forgive your balance afterwards. However, short sales aren’t common these days, due to inflated home values.
There is no standard when it comes to credit card and personal loan forgiveness. Contact your lender to see what options you have. Most major lenders and card companies have debt forgiveness programs, but eligibility requirements vary.
It can be a hard conversation, but call your lender before you start falling behind, not after. Being proactive shows responsibility, and lenders are generally more willing to work with responsible borrowers.
You could qualify for financial assistance if you can’t afford your medical bills. The Affordable Care Act (ACA) requires tax-exempt hospitals to offer free or discounted care to lower income people.
Ask a hospital social worker for a copy of the hospital’s Financial Assistance Policy (FAP). Plus, you should also get an itemized bill that shows exactly what the hospital is charging, line by line — medical bills are notorious for billing errors.
– Changing policy: On Jan. 7, 2025, the Consumer Protection Financial Bureau (CFPB) ruled that medical debt could no longer be included on your credit report. At the time of this writing, the CFPB is currently trying to block this law now that it’s under a new administration. Keep your eye on the news as details continue to roll out.
You can get some back taxes forgiven by filing for bankruptcy, but the taxes must be at least three years old (and meet other conditions). Generally, IRS tax debt relief comes in two forms.
Offer in Compromise: The IRS might settle for a lower amount if you can get an Offer in Compromise. During the process, you must prove that you can’t afford your taxes in full and propose a payment that the IRS accepts.
At base level, you can’t get an Offer in Compromise if you haven’t been filing tax returns, haven’t been making estimated required payments or have an open bankruptcy.
– Quick tip: Use the IRS’ Offer in Compromise prequalification tool to see if you qualify.
Payment plan: You could pay what you owe in monthly installments. Some payment plans come with fees, and all accrue interest. The current IRS interest rate for individuals is 7%.
If you go this route, pay what you owe as fast as you can. Interest on taxes compounds daily, which means you’ll be paying interest on your interest.
– Quick tip: You can apply online for an IRS payment plan.
Like with personal loans and credit cards, whether you can get relief on your auto loan will depend on your lender. You could also look into an auto refinance loan.
Refinancing can be a great way to save if you’ve recently improved your credit score. You might get a better rate than what you’re currently paying.
You could also lower your monthly payment by refinancing to a longer term. For instance, if you have 24 months left on your car loan but you refinance to a 36-month loan, you’ll get to stretch out your remaining balance by an entire year. (That extra time will cost you extra overall interest, though.)
How do taxes work on forgiven debt?
Unless you’re filing for bankruptcy, the IRS generally treats forgiven debt as taxable income. That means forgiven debt could bump you into a higher tax bracket. It’s important you understand what that means, but it’s not as scary as it sounds.
When you move up a tax bracket, only the amount that bumped you up is taxed at the higher rate. In other words, if your reported income (including forgiven debt) bumps you from the 22% tax bracket to the 24%, only the amount that caused the bump will be taxed at 24%.
- Changing policy: Mortgage and student loan debt is exempt from the annual income rule, but that relief expires on Dec. 31, 2025.
Common debt forgiveness pitfalls
- Getting forgiveness but not changing habits: Debt forgiveness isn’t a long-term solution. If you don’t review your budget, you may end up right back where you started.
- Forgetting to calculate taxes: Your lender will report your forgiven debt to the IRS. There are some exceptions, but most canceled debt is taxable as long as the amount is $600 or more.
- Not considering your credit score. Some forms of debt forgiveness tank your credit score — short sales, for instance.
- Falling for a debt settlement scam: There are plenty of reputable companies out there, but you may also encounter debt settlement scams. Always check the CFPB’s consumer complaint database before going with a company.
Debt forgiveness alternatives
Debt forgiveness isn’t the only debt relief option out there. If you don’t qualify for forgiveness, consider:
Debt consolidation
Debt consolidation works best if you have a 720 (or higher) credit score and can afford what you owe, but are having a hard time juggling bills.
Debt consolidation doesn’t get rid of your debt, it restructures it.
Instead of paying your credit card and personal loan bills separately, you’ll get one big personal loan to pay them all off. Then, you only have one bill to pay — your debt consolidation loan.
You could also save interest by consolidating if you have excellent credit.
LendingTree users with 720-plus credit scores see an average personal loan rate of 17.71% when they get a loan through our platform. Compare that to the current average credit card interest rate, which is 24.33%.
Want to see if you can save with a debt consolidation loan? Our debt consolidation loan calculator can help with that.
DIY repayment plan
A DIY repayment plan costs you nothing, and all it takes is a call to your credit card or lender.
Your lender might have payment plan options for you if you’ve lost your job, are sick or are dealing with another financial hardship. Most want to get you back on track with partial payments, since something is better than nothing.
Call your credit card or loan company if you’re having trouble paying, ideally before you’re actually late. You might be able to pause your payments or lower your monthly bill, temporarily or permanently.
These options typically mean you’ll pay extra interest, but it could be worth it as missed payments can seriously damage your credit score.
Credit counseling
If you’re ready to stop using your credit cards and overhaul your relationship with money, credit counseling might be for you.
Credit counseling is usually nonprofit. A licensed professional will review your finances, help you come up with a budget and work with your creditors on your behalf. They might also be able to get you a lower interest rate or fees waived through negotiation.
Your credit counselor might recommend that you go on a debt management plan. With this strategy, you could get your credit cards and most personal loans paid off in three to five years. However, you usually can’t use credit while working your debt management plan.
Use this online tool from the U.S. Department of Justice to find a legit credit counselor near you.
Debt settlement
Debt settlement could be worth exploring if you have debt in collections but aren’t ready for bankruptcy.
You might be able to get out of debt for less than you owe by using a debt settlement company.
Instead of paying your credit card company and/or personal loan lenders, you’ll give that money to the debt settlement company. The debt settlement company puts that money in a dedicated bank account and then uses the lump sum to negotiate with your creditors.
Unlike credit counseling, debt settlement companies are for-profit with fees that range from 15% to 25% of your requested settlement amount.
Debt settlement tends to be more successful if your debt has already been sent to collections — it can also be risky.
Expect your credit score to plummet since you’ll stop paying your credit cards and instead will be paying the debt settlement company. Further, as a rule, some lenders won’t negotiate with debt settlement companies. You might have better luck calling them yourself and asking for help.
Bankruptcy
Bankruptcy is best if you have no way of paying back what you owe and truly need a fresh start.
Bankruptcy isn’t a decision to take lightly, but it doesn’t deserve its stigma, either. Bankruptcy can give you the clean slate you need when you have an impossible amount of debt with no way out.
- Chapter 7 requires you to sell certain assets to pay off eligible debt. Then, the leftover balance is forgiven. In reality, most Chapter 7 cases are “no asset,” meaning the filer didn’t own anything that could be sold.
- Chapter 13 doesn’t require you to sell assets. Instead, you’ll pay it off with a three to five year payment plan. How much you pay back will depend on how much you earn, and you’ll have to put most if not all of your disposable income toward your debt.
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