What is debt forgiveness and how does it work?

Whether it’s personal loan debt or asset finance loan debt, the average Nigerian is amassing more of it daily, courtesy of the nation’s free-falling economic status.

Although debt forgiveness is not a common practice in most developing countries like Nigeria (since, more often than not, they are the ones seeking debt relief), our international counterparts practice it extensively on various scales.

In a nutshell, if you reside in a country where debt forgiveness programs exist and are struggling to cover debt payments or feel like you’ll never be able to pay everything off, you might consider debt forgiveness an option. Let’s take a look at what it is and how it works.

Featured read: Why you should embrace the sharing economy

What is debt forgiveness?

Debt forgiveness (DB), also called debt relief or cancellation, acts as a lifeline for debtors. It allows lenders to erase some or all of a borrower’s outstanding debt. Essentially, it can be a way to get out of debt without paying. Sounds too good to be true? Many times, it is.

In many advanced countries, debt forgiveness programs help people wipe out thousands of dollars in debt. However, these programs have been disappearing lately, making it harder to find simple ways to clear debt if those options are even available anymore. 

Sadly, as genuine DB programs are fading away, fraudulent scams are becoming more common. These shady alternatives can end up costing you money and damaging your credit.

Featured read: How the Nigerian government can boost the economy via the credit ecosystem

How does debt forgiveness work?

Debt forgiveness can happen in various ways, such as negotiated settlements, repayment plans or government programs. The goal is to help people manage their debts and financial stability.

To apply, start by speaking to your lender. They may offer special programs. If you meet the eligibility requirements, your lender may forgive either a portion or the entirety of the outstanding balances on your unsecured debt, potentially including unsecured personal loans or medical bills.

A debt forgiveness program could involve:

• Wiping the debt out altogether in bankruptcy.
• Using a debt management plan to get changes in your interest rate or payment schedule.
• Negotiating with creditors to settle the debt for less than the total amount owed.

However, these programs are not the right solution for everyone, and it’s important to understand that they come with risks.

Featured read: Starting a loan business in the UK

Types of debt forgiveness

Debt forgiveness isn’t a one-size-fits-all solution. Here’s a breakdown of some common types:

Student loan

People with federal student loans might be eligible for a student loan forgiveness program. If their loans are forgiven, cancelled, or discharged, they won’t have to pay back the remaining balance. This can happen in cases such as total and permanent disability, if the school they borrowed money to attend shuts down, or individuals employed in particular professions, like education and public service, among other situations.

Medical

Medical bills can escalate fast and become overwhelmingly expensive. To address this, some hospitals offer medical bill debt forgiveness programs, and nonprofit hospitals are legally obligated to provide such programs. To determine your eligibility, contact the hospital where you incurred the debt and inquire about their “financial assistance policy” or “charity care.” Your eligibility is typically based on your income. Even if the entire debt is not forgiven, you may still qualify for a significant reduction in your bill.

Credit card

While there isn’t a specific forgiveness program for credit card debt, debt settlement can be an option if you are ineligible for bankruptcy and struggling to make minimum payments. A debt settlement company can negotiate with your creditors to reduce your debt, but keep in mind that there is no guarantee your creditors will agree to the settlement.

Featured read: All you need to know about the new student loan law

The appeal of debt forgiveness

Debt forgiveness can offer much-needed relief for those overwhelmed by debt. In Nigeria, where many people are grappling with growing loan debt due to the tough economy, erasing some or all of this burden is appealing.

While debt forgiveness programs are common in some countries, they’re less so in Nigeria. However, these programs can still be lifesavers if you qualify. They work in different ways, such as negotiating settlements, adjusting repayment plans, or through government schemes.

It’s also important to be cautious of scams and to fully understand the terms before jumping in. Although debt forgiveness isn’t a one-size-fits-all solution, for many, it could be the break they need to get back on track financially. Have more questions? Send us a message at growth@lendsqr.com.