Borrowers have spent the last few years adjusting to higher borrowing costs amid elevated inflation and rising prices, but many are discovering that the biggest challenge they’re facing isn’t avoiding new debt — it’s getting rid of the debt they already have. At today’s nearly 22% average rates, even the borrowers who have stopped using their credit cards are finding that the steep interest charges on their cards can keep their balances stubbornly high, making the payoff process a frustratingly slow endeavor. That, in turn, has prompted many borrowers to rethink their credit card payoff strategies.
For example, rather than asking how long it will take to eliminate their credit card balances, many borrowers are now asking whether there are ways to reduce the amount they owe altogether to make it easier to get their debt issues under control. As more borrowers explore their debt relief options, debt forgiveness has become an increasingly common part of that conversation. The appeal of debt forgiveness is obvious: Settling a debt for less than the full balance could potentially help borrowers save a lot of money compared to traditional payoff strategies.
But the amount you might save with debt forgiveness isn’t as straightforward as you may think. The savings depend, in large part, on how negotiations unfold and what fees are involved. So, how much can you actually save by pursuing debt forgiveness if you’re carrying a $20,000 balance this August? That’s what we’ll calculate below.
Find out if you qualify to enroll in a debt forgiveness program now.
How much can debt forgiveness save on a $20,000 balance this August?
Debt forgiveness, which can be pursued on your own or through a debt settlement program, generally results in creditors agreeing to accept 30% to 50% less than the amount originally owed. That said, the outcomes can vary, and depend, in large part, on factors such as your financial hardship, how delinquent the account is, the type of debt you owe, the creditor’s policies and your ability to fund settlement offers. If you’re considering the average, though, here’s what the savings could look like on a $20,000 balance:
- 30% debt reduction: If your creditors agree to forgive 30% of the balance, you’d pay $14,000 instead of $20,000, resulting in $6,000 in gross savings.
- 40% debt reduction: A 40% settlement would reduce your repayment to $12,000, creating $8,000 in gross savings.
- 50% debt reduction: If you secure a 50% reduction, you’d repay $10,000, producing $10,000 in gross savings before fees.
Those aren’t necessarily your final savings if you’re working with a professional debt relief company during the settlement process, however. Debt relief companies charge fees for their services, which vary, but generally range from 15% to 25% of the enrolled debt. On a $20,000 enrolled balance, that typically works out to $3,000 to $5,000 in fees. For example:
- A 40% settlement saves you $8,000 before fees. If your debt relief fee totals $4,000, your net savings would be approximately $4,000.
- A 50% settlement creates $10,000 in gross savings. With a $3,500 fee, you’d still save about $6,500 overall.
Those figures don’t account for potential tax consequences, though. In many cases, the forgiven debt will be considered taxable income unless you qualify for an IRS exception.
Learn more about the debt relief strategies available to you today.
How to determine if debt forgiveness is worth pursuing now
Debt forgiveness can be a powerful tool for borrowers who qualify, but it isn’t automatically the best solution simply because you owe a substantial amount on your credit cards. Before enrolling in a program, it’s important to consider your overall financial picture.
Start by evaluating whether you’re actually unable to repay your debts through traditional methods. If your monthly payments have become unmanageable, you’re relying on credit cards to cover everyday expenses or you’re falling behind despite making a genuine effort to keep up, debt forgiveness may deserve consideration.
You should also compare it against other forms of debt relief. If your credit is still relatively strong, a balance transfer card or debt consolidation loan could lower your interest costs without damaging your credit as significantly. Or, a debt management plan through a credit counseling agency could reduce your interest rates while allowing you to repay your balances in full over time.
You’ll also want to think about the timing. Because debt forgiveness generally works best after accounts have become delinquent, borrowers who are still current on their payments should carefully weigh whether intentionally falling behind makes sense. The temporary credit damage and collection activity can be substantial, particularly if your financial situation may improve in the near future.
The bottom line
Debt forgiveness has the potential to generate meaningful savings on a $20,000 balance, with settlements often reducing what borrowers ultimately repay by 30% to 50% before fees are calculated into the equation. But even after accounting for debt relief company costs, many borrowers still save thousands of dollars with this strategy. Those savings come with tradeoffs, though, including credit score damage, possible tax implications and months of negotiations.
That’s why debt forgiveness shouldn’t be viewed as a shortcut. Rather, it should be evaluated alongside other debt relief strategies based on your income, financial hardship and long-term goals. Taking the time to compare your options now can help ensure that the money you save today doesn’t create bigger financial challenges tomorrow.