What You Should Know Before Opting for Credit Card Forgiveness

What is credit card forgiveness?

Credit card forgiveness is when a credit card company offers you the chance to bring your past due account current by paying a reduced lump sum. If, for example, you owe $1,000 and are a few months past due, they may offer to bring your account current and close it out for a lump-sum payment of $500 or $750.

The idea behind credit card forgiveness is that you are able to get rid of your debt by paying a smaller lump sum right away, and the credit card company gets at least some of their money.

While this appears to be a great way to bring your account current, there are some pitfalls involved with taking advantage of this offer.

Credit card forgiveness backlash

While the idea of credit card forgiveness is enticing, there is a downfall. Uncle Sam gets a cut of any amount the credit card company forgives.

Let's say that you have $10,000 in credit debt and the credit card company gives you a payoff amount of $5,000. Sounds like a great deal, right? So you pay your $5,000 and your account is paid in full. Great! Until tax time that is.

While it's all well and good that your credit card is paid off, the IRS considers the amount you saved in the credit card forgiveness process as income earned, which means you have to pay taxes. This may not sound like a big deal, but if you were already strapped for cash to begin with, it can be big problem.

The next time you find your credit provider offering you the chance for credit card forgiveness, remember that the savings you may think you're getting may not be quite as much as you expected.