What Is Debt Forgiveness?

To understand debt forgiveness, let's consider an illustration. Whether it concerns an individual, a local or state government, or even another nation; the same principle applies. Debt is incurred when something unexpected happens and there's an immediate need for financial help, beyond the person or government officials' ability to deal with! This could be from a natural disaster such as hurricanes, tornadoes, flooding, tsunamis, earthquakes or fires. With individuals, prolonged illness or debilitating accident could have caused his troubles. When faced with multiple problems, sometimes one following another, it becomes an impossibility to repay the debt. Forgiveness means eliminating all or part of the amount owed, thus reducing amount of loss overall. Nations can also be involved in this type transaction that may have occurred in past years. When applied to nations, this will also help develop the nation's economic situation.

There can be some advantages to the creditors who may decide on forgiving debts. This frees up time and money being spent in trying to collect on the amounts owed. One other point to consider is that due to laws and statutes concerning debt forgiveness, the creditor can use the unpaid loan as a tax deduction whether claiming all or only a partial amount of loss. The creditor then finds the debt forgiveness benefit on his taxes helps diminish the amount lost by the unpaid loan.

An individual debtor has a choice in deciding whether to have all or only part of his debt forgiven. When he has gone through financial troubles and can't meet his loan obligations, this ability to choose can really help him out. However, he needs to remember the amount of debt forgiveness will be considered as taxable income. While helping him out of one bad situation, it also creates another problem as he'll then be considered on a different tax level that year and have higher taxes to pay than he had anticipated.

When concerning a nation who is recovering from a national disaster and will be unable to repay debts borrowed from other countries for many years, those nations may decide to write off the money owed, rather than put extra hardship on the debtor country. It is determined a better way to deal with the situation rather than chance affecting the world's economy.

In discussing individuals or nations and loans made between them, debt forgiveness is not something to be taken lightly as there are other choices to be considered. If there's any possibility that financial circumstances will improve, then forgiving debt is not agreeable to the creditor. However, if financial improvement is not likely to happen within an appropriate length of time, then debt forgiveness appears to be the only option available.