Cancellation of a debt is very much what it sounds like. When a debt is cancelled, then the debtor is completely released from their debt, and no longer needs to make further payments. 

Debt cancellation usually occurs after a lender and a borrower reach an agreement, such as when a bank agrees to release a person from their mortgage debt. However, cancellation is not just limited to agreements between banks and individuals. Cancellation of a debt can happen in any circumstance when money is owed, whether it involves banks, individuals, businesses, or a combination of those. 

What is a Debt Cancellation Agreement?

A debt cancellation agreement is basically a contract that outlines the agreement between the lender and the borrower. It details the terms for the release of the debt. To be valid, the written debt cancellation agreement has to satisfy the requirements for a valid contract under the laws of your state. 

This often requires that the agreement be in writing; you should not rely solely on oral promises or agreements. It is in your best interests to get the cancellation agreement in writing so that it is legally enforceable.

Debt cancellation agreements can be extremely useful in circumstances where other methods fall short. For example, declaring bankruptcy may wipe out certain debts, but it does not automatically result in the cancellation of others, like student loans. The borrower may need to negotiate directly with their student loan provider if they wish to have their student loans cancelled. The borrower will need to send the lender a debt cancellation agreement to sign, if the lender agrees to the new arrangement.

Sometimes, debt cancellation agreements are provided by the lender in a standardized document. In other cases, the original document detailing the terms of the loan may contain a provision that discusses whether cancellation may be an option in the future. If it is, the agreement should also state under what circumstances it is available.

In most cases, the debt cancellation agreement will need to be drafted by the borrower and presented to the lender for their agreement and signature. The agreement can take a few different forms, but the most common form is a contract stating that the lender will release the borrower from the debt. 

Why Would a Lender Agree to Debt Cancellation?

There are several reasons a lender may be persuaded to agree to a debt cancellation. Generally, there must be a good reason for the lender to cancel or forgive the remaining debt. These can include death, disability, bankruptcy, or the destruction of the collateral. However, even these circumstances do not guarantee that a lender will agree to a debt cancellation.

What Information is in a Debt Cancellation Agreement?

It’s probably in your best interests to have your debt cancellation agreement drafted in writing and reviewed by a lawyer before you sign anything. In order to make sure that the document is legally binding, it must include certain information (like the information that creates a valid contract).

For example, the agreement should at the very least contain:

  • The names of the parties involved, such as the lender, the borrower, and any witnesses (if necessary);
  • The exact monetary amount that is owed by the borrower;
  • The exact amount that is being forgiven under the agreement;
  • The date that the money was lent (in many cases, this will be the date of the promissory note); and
  • The date that the cancellation agreement will be effective.

The agreement should also be signed and dated by all parties. Depending on your state, you may also have to have the document notarized. Once the agreement has been finalized, accepted, and signed by both the lender and the borrower, the agreement becomes a legally binding agreement. 

The lender can no longer attempt to collect on the debt that was cancelled as a part of the cancellation agreement. However, if the lender does make further attempts to collect the debt, the cancellation agreement can be used as evidence that the borrower no longer owes this debt. 

Something else to consider is whether the cancelled debt will still come back to haunt you. In many cases, canceled debt is still recorded by creditors, and reported to the borrower as income on federal tax forms. You might be required to pay tax on the canceled debt, so keep that in mind and try to plan ahead.

Should I Talk to a Lawyer About Issues with a Debt Cancellation Agreement?

If you find yourself having trouble with issues recording a debt cancellation agreement, it is in your best interests to talk to an experienced bankruptcy lawyer and get some sound advice. A qualified lawyer can help you draft or review the agreement, and discuss with you the pros and cons of signing such an agreement. 

If you are finding yourself facing a lawsuit that involves a cancellation agreement, your lawyer can advise you on the best course of action and even represent you in court, if needed.