Recent events have compounded the already growing number of Americans living with crushing debt. Some have filed for bankruptcy while others simply have defaulted on their loans. Interestingly, there has been a push for a different and somewhat radical form of debt relief in the form of debt forgiveness. Not all debt can be forgiven and some debt forgiveness may have tax implications. Here’s more on what debt forgiveness is including the benefits and possible ramifications of this emerging form of debt relief.

What Is Debt Forgiveness?

While seemingly self-explanatory, debt forgiveness consists of a lender erasing some or all of a legitimately owed debt. Perhaps the most common form of debt forgiveness is debt settlement. This happens when a lender forgives a portion of a debt if the borrower agrees to immediately pay a lump sum. That sum constitutes a portion of the total debt. A lender of unsecured debt sometimes forgives a portion of the overall debt if they sense that the borrower may be filing for bankruptcy. Notably, a borrower’s bankruptcy could erase their debt in full, leaving the lender with no recourse.

The second most common form of debt forgiveness occurs in connection with student loans. Depending on the lender, there are various programs for borrowers to enter into which may forgive some if not all of their student loan balance. The federal government has a program of debt forgiveness for borrowers who work in certain qualifying public interest jobs. The program works by requiring borrowers to make a set number of timely payments after which the remaining balance is forgiven for certain qualifying federal loans.

What’s The Catch?

While having your debts forgiven sounds attractive, there are some things to consider. Namely, most debt that is forgiven carries important tax implications. The IRS has taken the position that debt that has been forgiven may count as income. Because of this, you may be forced to pay taxes on the amount of debt that is forgiven. For student loan borrowers with significant student loan debt, this could mean a rather large tax bill. Additionally, unsecured debt that is forgiven through debt settlement may also have an effect on your credit rating.

On a final note, it is important to differentiate between forgiveness and discharge. Typically, discharge only occurs when you file for bankruptcy. Further, discharge may not carry the tax implications that can be present in debt forgiveness. Still, discharge often results in significant credit damage that may not be removed for up to ten years from the date of filing.

Florida Bankruptcy Attorneys

The Bankruptcy Team, PLLC is devoted to helping clients resolve their financial issues through bankruptcy, foreclosure or other means. Our experienced attorneys will carefully review your situation with you and then advise you on options that closely fit your needs. Our experienced attorneys will thoroughly review your situation and advise you about viable solutions. To consult with The Bankruptcy Team, PLLC, call or contact us today.