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The truth about debt forgiveness

In 2016, John Oliver purchased $15 million in unpaid medical debt for $60,000. After purchasing the debt, the host of Last Week Tonight forgave it. While this may seem like a nice gesture, it may not have as much of a positive impact as one may think. First, the type of debt that Oliver purchased was time-barred. In other words, it was debt that could no longer be collected because of the applicable statute of limitations, which Kentucky and every other state has.

However, making even a small payment toward that debt could restart the clock on the statute of limitations. Furthermore, it could be seen as helping to fund an illegitimate collection agency. Another important aspect to keep in mind is that forgiven debt may become taxable income. Therefore, those who are in no position to pay off their debt to creditors now owe a new debt to the IRS.

Forgiving a debt may not help an individual's credit score unless it is actually reported to credit agencies. Even then, forgiving a debt may not make it any better from a credit perspective. The silver lining is that new FICO scoring models treat medical debt differently than other types of debt. This means that having zero debt balance could have an impact on a borrower's credit score over time if not right away.

While debt forgiveness has both pluses and minuses, it is of course not the only form of debt relief. In some cases, people who have high credit card or medical debt that they are struggling with can negotiate a payment plan with their creditors. An attorney can often suggest other approaches as well.

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