6 Risks of Pursuing Credit Card Debt Forgiveness

Credit card debt forgiveness, also known as debt settlement, can seem like an appealing solution for those overwhelmed by high-interest credit card debt. However, it comes with significant risks that you need to understand before proceeding. Here’s a breakdown of the potential pitfalls:


1. No Guarantee of Success

  • Risk: Creditors are not obligated to agree to a settlement, meaning you could still owe the full balance, along with accumulated late fees and interest.
  • Reality Check: You might not end up reducing your debt at all, making it crucial to manage expectations.

2. Long-Term Credit Damage

  • Risk: Settling debt can hurt your credit score significantly. Delinquent accounts or settled debts can stay on your credit report for up to seven years.
  • Impact: This can make it harder to qualify for future loans, credit cards, or even housing.

3. Accumulation of Interest and Fees

  • Risk: During settlement negotiations, you’re often advised to stop payments. This can lead to growing balances due to high interest rates, fees, and penalties.
  • Outcome: If negotiations fail, you may owe more than you originally did.

4. Potential Legal Action

  • Risk: Creditors could sue you if they refuse to settle, leading to court judgments, wage garnishments, or liens on your property.
  • Cost: Legal proceedings can add to your financial burden and damage your credit further.

5. Tax Consequences

  • Risk: Forgiven debt is often considered taxable income by the IRS. You could face unexpected taxes on the forgiven amount.
  • Consideration: If a creditor forgives more than $600, they will report it to the IRS, potentially resulting in a tax bill.

6. Additional Costs

  • Risk: Debt relief companies charge fees, typically 15% to 25% of your enrolled debt. These fees can eat into the savings achieved through forgiveness.
  • Balance: Ensure the savings from forgiveness outweigh the fees.

Debt forgiveness can be a viable option for those drowning in credit card debt, but it’s important to weigh the risks carefully. Make sure you understand the potential impacts on your credit, finances, and even taxes before making a decision.