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Debt Cancellation Agreements

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What is Cancellation of a Debt?

Cancellation of debt, or “debt cancellation”, refers to the act of completely releasing a person from debt.  When the debt is cancelled, the borrower will no longer be under any obligation to repay the money.

Debt cancellation usually occurs from a lender to a borrower, such as when a bank releases a person from mortgage debt.  However, cancellation of debt can occur whenever money is owed, whether it be between individuals, businesses, or both.  Cancellation of debt is also referred to as discharge of indebtedness.  

What is a Debt Cancellation Agreement?

 A debt cancellation agreement is basically a contract stating the terms of release between the debtor and the party to whom the money is owed.  To be valid, a debt cancellation agreement should satisfy the requirements for a valid contract under state laws. 

Debt cancellation agreements are useful in times when normal routes do not provide for immediate cancellation of debt.  For example, filing for bankruptcy does not automatically result in cancellation of student loans.  Thus, a person may need to negotiate separately with the student loan company if they seek to have their student debt cancelled.  In that case they will need to present the student loan a debt cancellation agreement, which the loan company may or may not agree to sign. 

Debt cancellation agreements are sometimes provided in a standardized document by the lending company.  Or, the debt cancellation agreement can be contained in the original lending contract.  For example, the lending contract may contain a provision that states whether cancellation will be an option in the future, and if so, under what circumstances. 

In most cases a debt cancellation agreement will need to be drafted by the borrower and presented to the person or business who will cancel the debt.  The agreement can take the form of a contract stating that the lender will release the borrower from the debt. 

What is Contained in a Debt Cancellation Agreement?

It is best if a debt cancellation agreement is drafted in writing and reviewed by a lawyer- this will ensure that the writing is accurate and in compliance with the law.

Debt cancellation agreements should contain the following information:

  • The names of the various parties involved, such as the lender, the debtor, and any witnesses
  • The exact monetary amount that is owed by the party in debt
  • The exact amount that will be forgiven
  • The date that the money was lent
  • The date that the cancellation will take effect
  • The signatures of all the parties, and the date of signing

Once the agreement is finalized and signed by both parties, the agreement becomes binding and enforceable under law.  This means that the lender can no longer attempt to collect on any debts that were cancelled through the agreement. 

If the lender continues to try collecting, the cancellation agreement can be used as evidence in court.  This is why it is so important that the debt cancellation agreement be formally recorded in writing.

Do I Need a Lawyer for Legal Issues With a Debt Cancellation Agreement?

A bankcruptcy lawyer can be of great assistance if you have issues with a debt cancellation agreement.  A lawyer can help you draft and review a debt cancellation agreement, so that it can be enforceable in a court of law.  Or, if you are facing a lawsuit involving a cancellation agreement, your attorney can represent you during the court proceedings. 

Photo of page author Ken LaMance

, LegalMatch Law Library Managing Editor and Attorney at Law

Last Modified: 07-09-2018 07:25 PM PDT

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