Cancellation of a debt is very much what it sounds like. When a debt is canceled, the one who owes the money (the “debtor”) is completely released from their debt and does not have to make any future payments.
Debt cancellation usually occurs after a lender and a borrower reach an agreement. Perhaps a bank agrees to release a debtor from their mortgage debt. Cancellation is not just limited to agreements between banks and individuals. Debt cancellation can happen when money is owed, whether it involves banks, businesses, individuals, or a combination.
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. The written debt cancellation agreement has to satisfy the requirements for a valid contract under the laws of your state to be valid. At a minimum, any contract must contain:
- An offer (I will pay you $5000 for your car)
- An acceptance of the offer on the same terms (I will sell my car to you for $5000)
- Something of value must be given (the car)
- A time for the event to take place (I’ll pick up the car on Thursday)
- Performance of the transaction
A contract can be either oral or written. However, oral contracts are more challenging to enforce and should be avoided. In some states, certain kinds of contracts must be written in order to be valid, such as contracts that involve a significant amount of money (over $500) and contracts for real estate.
Debt cancellation agreements can be extremely useful in circumstances where other methods of getting rid of debt fall short. For example, declaring bankruptcy will wipe out certain debts, but it does not automatically result in the cancellation of some others, like student loans. The borrower may need to negotiate directly with their student loan provider if they wish to have their student loans canceled.
Sometimes, the lender provides debt cancellation agreements in a standardized document. In other cases, the original document detailing the loan terms may contain a provision that discusses whether cancellation may be an option. If it is, the agreement should also state under what circumstances it is available.
Why Would a Lender Agree to Debt Cancellation?
A lender may be persuaded to agree to debt cancellation for several reasons. These can include death (lenders often forgive a loan if the debtor dies), disability (similarly, lenders may cancel a loan if the debtor contracts a disability and can no longer work and so can’t pay back the debt), or bankruptcy of the debtor.
What Information is in a Debt Cancellation Agreement?
In order to make sure that the document is legally binding, it must include certain information. For example, the agreement should, at the very least, contain all of the elements of a contract, as described above. It should also contain the following information describing the intended cancellation:
- The names of the parties involved, such as the lender, the borrower, and any witnesses (if necessary)
- The exact monetary amount that the borrower owes
- 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)
- 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 contract.
Note that in many cases, canceled debt is still recorded by creditors and noted on your credit report. The lender may also report it to the IRS, in which case it will be treated as income and must be included in a tax filing. You might be required to pay tax on the canceled debt, so keep that in mind and plan.
Because drafting a thorough debt cancellation agreement is complex, It’s probably in your best interests to have it drafted in writing and reviewed by a lawyer before you sign anything.
What is Debt Relief?
Debt relief is the total or partial cancellation of certain debt. It usually refers to relief from money owed on credit cards. Debt relief can provide individuals with much-needed help getting out from under their debt. However, it can have unforeseen consequences that might be quite unpleasant.
For example, just beginning the process may severely damage an individual’s credit score. It may take 7 years or more to restore the debtor’s credit. Even the best debt relief program cannot fix a damaged credit score. A low credit score might make it impossible for a person to apply for new credit cards or obtain a mortgage. It is also important to note that debt relief is not a fast fix to eliminate debt. The project takes several months.
How Does Debt Relief Work?
In most cases, debt relief or settlement begins when the debtor fails to make monthly payments, usually for 6 months or more. The debtor often offers their creditors a lump sum payment, usually much less than they owe, to settle the debt.
Creditors are aware that if a person is in such a financial condition that they cannot make their payments, it might be a good idea for the parties to enter into debt relief. If the creditor rejects the debtor’s officer, the creditor may end up with much less money. Perhaps the debtor can enter into debt relief agreements with other creditors, and the debtor’s money will go to them instead of the creditor.
If the debtor has to file for bankruptcy, a trustee will decide how much money the creditor will receive, and that may well be just pennies on the dollar. If the creditor believes they will not be able to receive any more money from the debtor than what has been offered, they may be willing to accept the offer. On the other hand, if they think they can get more money than the offer represents, they may turn the debt over to a collections agency or sue the debtor for the amount owed.
What are Debt Relief Programs?
Numerous debt relief programs and debt relief companies offer debt relief assistance to consumers. Before an individual decides to work with a particular debt relief company, they should research the company to determine whether there are any consumer complaints and if the company must be licensed in the individual’s state of residence.
It is important to find out what services the company provides, how much it costs, and how long the process will take. An individual should get as much information as possible in writing and carefully read any and all documents provided by the company.
There are no government debt relief programs or federal debt relief programs that forgive or even minimize an individual’s credit card balances. There are, however, non-profit consumer credit counseling services that assist individuals with debt relief. Grants from credit card companies fund these services.
Should I Talk to a Lawyer About Issues with a Debt Cancellation Agreement?
If you have trouble with credit card debt issues, it is in your best interests to talk to an experienced credit lawyer and get some sound advice. A qualified lawyer can help you draft or review a credit relief agreement and will discuss the pros and cons of signing such an agreement.