As credit card debt climbs nationwide and credit card interest rates soar, many Americans have found themselves struggling to pay off what they owe. After all, you don’t need a high balance to find yourself in serious financial trouble when your credit card interest rate is 23% (or higher), as the interest charges will compound quickly at that rate. As a result, many cardholders are looking for relief, and credit card debt forgiveness programs are one option worth considering. 

These programs are typically offered through debt relief companies and can help borrowers negotiate with creditors to reduce their outstanding balances — sometimes by as much as 50%. However, the path to debt forgiveness is filled with potential pitfalls that could leave you in an even worse financial position than when you started. While the promise of reducing your debt burden is alluring, making the wrong moves during this process can expose you to legal action from creditors or even lead to tax complications.

So before pursuing credit card debt forgiveness, it’s crucial to understand the common mistakes that could derail your debt relief journey and potentially cost you thousands of dollars. Otherwise, this approach could end up costing you a lot more than you bargained for.

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Want to have your credit card debt forgiven? Avoid these 3 costly mistakes

Here are three critical errors to avoid when seeking credit card debt forgiveness.

Failing to understand the debt settlement process

One of the most significant mistakes people make is diving into debt settlement without fully understanding how it works. Unlike debt consolidation or credit counseling, debt settlement requires you to stop making payments on your debt for an extended period. This is designed to show creditors that you’re in financial distress and compel them to negotiate, but it comes with serious risks. Late payments will be reported to credit bureaus, further lowering your credit score and potentially triggering collection calls or lawsuits.

Many people also underestimate the importance of timing and strategy when approaching creditors. If you attempt to negotiate too soon — before demonstrating financial hardship — or without a clear plan, your creditors may be less likely to agree to a reduced payment. Others fail to research the terms or fees associated with hiring a debt relief company, some of which charge high costs for services that may not guarantee results.

To avoid this mistake: Educate yourself thoroughly about the debt settlement process and consider consulting a financial advisor or credit counselor before making any decisions. If you decide to work with a debt relief company, ensure it is reputable and transparent about its fees, timeline and success rates.

Find out what debt relief options are available to you here.

Overlooking tax implications of forgiven debt

Many borrowers are surprised to learn that forgiven credit card debt isn’t always “free money.” The IRS generally considers forgiven debt as taxable income, meaning that any amount your creditor writes off could result in an unexpected tax bill. For example, if you settle a $10,000 debt for $4,000, the remaining $6,000 may be subject to income tax, depending on your financial situation and local laws.

Failing to account for this can lead to financial headaches during tax season. Some people may even find themselves unable to pay the extra tax liability from their forgiven debt, creating a new debt issue on top of the one they just resolved. While certain exceptions apply — for example, if you’re insolvent at the time of settlement — these rules are not automatic, and you’ll need to file the appropriate IRS forms to claim the exemption in these cases.

To avoid this mistake: Consult a tax professional before finalizing any debt settlement. They can help you understand the potential tax consequences and advise on ways to minimize your liability. You should also keep detailed records of your financial hardship, as this documentation can be critical if you need to prove insolvency.

Neglecting to get the agreement in writing

Verbal agreements with your creditors to settle your debt for less than what you owe may seem reassuring in the moment, but they offer no legal protection if the creditor or collection agency goes back on their word. A common mistake is failing to insist on a written agreement that clearly outlines the terms of the settlement. Without this documentation, you risk continuing collection efforts, lawsuits or even the debt being sold to another collection agency.

This mistake is especially prevalent when dealing with third-party debt collectors, some of whom may use unethical tactics to secure payments. If you don’t have written proof of the settlement agreement, you could end up paying more than you originally negotiated — or worse, finding yourself back at square one.

To avoid this mistake: Always insist on receiving a written agreement before making any payment. The document should specify the agreed-upon settlement amount, the payment deadline and a confirmation that the remaining balance will be considered resolved. Once you receive the agreement, review it carefully to ensure it matches what was discussed, and save copies for your records.

The bottom line

Settling your overwhelming credit card debt for less than what you owe can be an effective way to regain financial stability, but the process requires careful planning and attention to detail. By avoiding these three costly mistakes — failing to understand the process, overlooking tax implications and neglecting to secure written agreements — you can navigate the debt settlement process more successfully. With a clear understanding of the big mistakes to avoid, along with a plan and the right resources, you can reduce your debt burden and move closer to a debt-free future.