How to Document Forgiving Debt

Sometimes, you just have to let bygones be bygones. It's often better to forgive and forget. Clunky adages, yes, but when someone owes you money, such expressions may prove applicable. Forgiving debt, whether a small personal loan to a friend or a larger sum to a family member, involves more than just a phone call or oral agreement. To properly forgive debt, a letter or contract is required.

Talk to the debtor. Whether you decide to forgive part or all of the debt, be sure he is clear about how much is being forgiven. Let him know you plan to put the agreement in writing.

Write up a forgiveness letter or agreement. If you choose to forgive the full amount, simply write a letter to that effect. If you're letting go of only part of the debt, include in the note the repayment terms of the portion of the debt to be repaid. Notate how much should be paid at each due date and how many payments should be made. Explain in the letter that the remainder of the debt will be forgiven once the partial sum is fully paid.

Give the debtor a receipt for the amount forgiven. Print the words "Paid in Full" on the receipt.

Tip

  • A forgiven loan may be subject to gift tax. According to the IRS, as of 2012, you can give $13,000 per year gift-tax-free to anybody for any reason. If your gift is larger, you have to file Form 790, the gift tax return. So if you loan a friend $100,000 and forgive $50,000 of it, you may be liable for gift tax on $37,000 the year of the forgiveness. However, if you choose to forgive only $13,000 per year for three years and $11,000 the fourth year, you may be able to sidestep the gift tax. IRS gift tax rules are complex and regularly revised. Consulting a tax professional is recommended.

About the Author

D. Laverne O'Neal, an Ivy League graduate, published her first article in 1997. A former theater, dance and music critic for such publications as the "Oakland Tribune" and Gannett Newspapers, she started her Web-writing career during the dot-com heyday. O'Neal also translates and edits French and Spanish. Her strongest interests are the performing arts, design, food, health, personal finance and personal growth.