Getting out of debt isn’t easy — especially after a job loss. Credit card balances can balloon fast once income dries up, and even small expenses start piling on interest. Sometimes, credit card companies will agree to "write off" some or all of your debt. But there are catches. Here’s what it means to have debt written off and what you should know before agreeing.
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Imagine James, a 32-year-old who recently lost his job and had to move back in with his parents. Between living costs, minimum payments and some bad timing, his credit card debt has climbed to $30,000. After explaining his situation to the credit card companies, one of them offered to “write off” a third of what he owes.
It sounds like good news — $10,000 in debt could be gone overnight. But before celebrating, James needs to understand what writing off debt actually means, and what it could cost him in the long run.
What it means when a company ‘writes off’ your debt
When a credit card company agrees to accept less than the full amount you owe — say, $20,000 on a $30,000 balance — it’s called a debt settlement. The lender agrees to forgive the remaining $10,000, and the debt is considered partially satisfied.
Lenders generally handle these settlements through a hardship or loss-mitigation department, where you’ll need to explain your financial situation in detail. You’ll likely have to prove you’re struggling by sharing pay stubs, unemployment documents or a budget that shows you can’t keep up with payments.
It’s also worth noting that debt-settlement offers are usually one-time opportunities. Once accepted, you’ll need to make the agreed-upon payment—sometimes in a lump sum, sometimes over a few months. Missing a payment can void the agreement and land you back at square one.
While a settlement can be a financial lifeline if you’re out of work or overwhelmed by payments, there are important trade-offs:
- It affects your credit: Even though you’re paying part of what you owe, the lender will report the account as “settled for less than the full balance.” That notation can stay on your credit report for up to seven years and may hurt your score.
- You may owe taxes on forgiven debt: The IRS considers most canceled debt to be taxable income. If your lender forgives $10,000, you may receive a Form 1099-C next year and could be liable for taxes on that amount. (1)
- The account will be closed: Once a debt is settled, that credit card is typically closed, which can affect your credit utilization ratio and overall score.
If you’re facing a similar situation, you’re not alone. According to data from Experian, the average American now carries $6,730 in credit card debt. (2)
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Next steps when getting out of credit card debt
If a creditor offers to settle or write off part of your balance, take time to review the offer carefully and get everything in writing. Make sure the agreement specifies that the forgiven amount will be reported as “paid as agreed” or “settled in full” to limit damage to your credit report.
Here’s how James or anyone in a similar spot can move forward:
- Confirm the details: Ensure the creditor clearly states how much you’ll owe after the write-off and what happens to the rest. If they charge a fee for the write-off, ensure you know the exact cost.
- Ask about tax consequences: Check whether the forgiven debt will generate a 1099-C tax form next year, and be ready to pay additional taxes. Consider having your job withhold a bit more on your W-4.
- Focus on paying down the remaining balance: If James still owes $20,000, he’ll need a realistic repayment plan. Make sure you can afford the monthly payments or have access to the lump sum before agreeing to the write-off.
- Avoid new debt: Cut off unnecessary cards and track spending closely. Even small steps — such as paying more than the minimum — help build momentum.
- Build better financial habits: Try adopting a cash- or debit-only mindset for a while and use a budgeting app to rein in spending. This will help you better understand your financial needs and make smarter money decisions. Consider getting a second job or starting a side hustle to pay down debt faster.
- Rebuild credit slowly: Use a secured card or become an authorized user on a responsible person’s account to start regaining positive credit history.
Debt forgiveness can offer a fresh start, but it’s not a get out of jail free card. Understanding what “written off” really means can help you avoid nasty surprises — and build a stronger financial foundation going forward. And remember: debt settlement isn’t your only option. Connect with a nonprofit credit counseling program to help you make the right decision (3).
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Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
IRS (1); Experian (2); National Foundation for Credit Counseling (3)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.