When you’re knee deep in debt and starting to panic about how you will ever make all your repayments it is understandable that you might start dreaming of debt forgiveness – that maybe one day your lenders might just write to you and tell you not to worry about your debt after all, or that one day someone might just bail you out and give you the money you need to pay off the debts. But does such a thing exist?
The good news is that yes – debt forgiveness does exist, often under the guise of ‘debt forgiveness’. Debt relief refers to the complete or partial forgiveness of debt, or the slowing or cessation of debt interest by the organizations or individuals owed the debt. Primarily the term debt relief refers to third world countries, which is used by the lender countries in order to try and help developing countries to recover from debt. This is a controversial subject because it of course reduces a revenue stream for the countries that are owed the debt, but for many third world countries completely paying off debt is actually rather infeasible.
Personal debt forgiveness or debt relief meanwhile comes most commonly from bankruptcy. When any debtor declares bankruptcy they will not be completely freed from the current debts, but rather the debt will be restructured. Their total owed amount may be reduced, or the interest may be frozen. In some cases however the borrower will be completely unable to pay and in this case debt forgiveness is unavoidable and often the lenders will be reimbursed by the state (i.e. the taxpayer). In some cases individuals will use ‘strategic bankruptcy’ in order to evade their debts. Of course there are also many negative aspects of claiming bankruptcy and for instance this will be highly damaging to your credit rating meaning that it is very difficult to get future loans. In some cases a lender might force you to declare bankruptcy (unsurprisingly called forced bankruptcy) if you fail to make your payments.
In other cases their may be clauses within your agreement with the debtor. Though this is rare, certain scenarios may result in debt forgiveness. If you have debt-repayment-insurance (sometimes provided by the lenders themselves) then this might mean your debt is paid off for you in the event that you fall ill or have your employment terminated. Other clauses within your contract, and other forms of insurance can also provide you with avenues to escape debt that could be considered ‘debt forgiveness’.
As a general rule, lenders want you to be able to pay off your debts however and would rather you didn’t use their repayment insurance or go bankrupt. As such you would be surprised how ‘forgiving’ they can sometimes be – rarely if ever would they cancel any debt but if you contact them or go through a dept management planner, you might be able to convince them to reduce your interest rates or to alter your repayment scheme.
So there are some forms of debt forgiveness, but none of these are quite the image you might have had in mind of a knight in shining armor riding in and slaying your debt. The best way to achieve debt forgiveness remains to simply pay your debt off yourself as quickly as possible to prevent accruing interest.