If you have gotten yourself into a difficult debt situation, a debt situation which is becoming increasingly difficult for you to navigate, then the possibility of having your creditor forgive part of your debt can turn out to be a very appealing one indeed. And as it turns out, debt forgiveness in the real life is something that is actually happening, with many debtors increasingly offering it to those of their debtors who owe them what can be termed as considerable amounts of money.

The arrangement is really quite simple. What happens is that the creditor informs the debtor that they will ‘forgive’ them a portion of their debt, as long as the debtor makes an effort to pay the rest of the debt in lump-sum. If, for instance, a debtor owes $10,000, the creditor could inform him that they will forgive them $2,000 (a considerable sum of money by all accounts), as long as they can pay them the remaining $8,000 in a one-off (lump-sum) payment. The creditor here rationalizes that it is better to get $8,000 than to have to write off the whole $10,000 (which is a very real possibility with increasingly delinquent debtors). And in any case, the $2,000 portion of the debt they forgive is probably what they would have had to spend in chasing the debt around. So for the creditor, debt forgiveness turns out to be very worthwhile. But is debt forgiveness worthwhile to the person whose ‘debts are forgiven?’

In the short term, as a debtor, you get to benefit from the ‘forgiven’ debt amount, which in some cases can be a considerable figure – like where out of $6,000 debt, the debtor lets you keep $1,000 if you can pay them $5,000 in lump-sum.

In the long term, though, the debt forgiveness can turn out to be bitter to you, as the debtor whose debt has been forgiven.

For one, when the taxman comes calling, you will be surprised to learn that they treat the amount of debt that was forgiven as an income – and actually tax it as such. It gets worse, should the forgiven debt amount actually push you to a higher tax bracket, in which case you might end up paying more in taxes than you would have received as debt forgiven, just on account of your having received it. And for the creditor to have considered you for debt forgiveness, chances are that you would have been highly delinquent in your repayments. But while they may forgive you in monetary times, chances are that they – if only out of good corporate citizenship – are likely to report the matter to the credit bureaus, leaving a blot on your credit report.

So when all is said and done, debt forgiveness could turn out not to be a worthwhile thing to the person it is supposed to benefit: the debtor.

The author like writing about debt management and how it can help a debt to reduce their debt. His site is at http://www.lesserdebt.com and there are articles about debt help for people that needs help with their debt.