Prayers for debt cancellation

What is ‘Cancellation of Debt (COD)’

Cancellation of debt (COD) occurs when a creditor relieves a debtor from a debt obligation. Debtors may be able to negotiate with a creditor directly for debt forgiveness. They can also receive debt cancellation through a debt relief program or by filing for bankruptcy. Debts forgiven by a creditor are taxable as income. Cancelled debt will typically be recorded by the creditor and reported to a debtor as income on a 1099-C.

BREAKING DOWN ‘Cancellation of Debt (COD)’

Cancellation of debt can greatly help to provide relief for a distressed borrower. In some cases debt forgiveness may also be offered between countries for economic support.

Distressed borrowers can work directly with a creditor to negotiate debt relief. Many distressed borrowers may choose to file for bankruptcy or work with a debt relief program which can lower a borrower’s total debt. When obtaining debt relief borrowers should plan ahead for taxes on potential savings since any income saved from a cancellation of debt is subject to tax and detailed in a 1099-C.

Negotiating with Creditors

Negotiating cancellation of debt with a creditor can be challenging. Most creditors are not willing to cancel individual debts as interest and fees on approved credit is the main source of income influencing their bottom line. However, some creditors do include provisions in their credit agreements for canceled debt. Many creditors also have credit relief services which can be obtained for a small additional fee and used in specific hardship situations such as a job loss or a medical occurrence. Reviewing the credit card terms of all creditors can help a borrower to identify on their own any creditors that they may easily qualify for debt cancellation from.

Certain loans issued under government programs may have a higher chance of debt forgiveness. These loans may include student loans or mortgage loans eligible for debt forgiveness under government sponsored relief programs. For distressed borrowers some lenders may also be willing to negotiate principal reductions on mortgage loans since it could save them some of the costs of a foreclosure.

Debt Relief Programs

Debt relief and settlement companies are available across the nation to help with debt forgiveness. Working with a credit counseling resource such as the National Foundation for Credit Counselors can help a borrower to identify an appropriate program for their situation.

Debt settlement companies are for profit entities that work on behalf of a borrower to negotiate debt settlement with creditors. There are numerous caveats to working with these companies and the process for settlement can take years. However, debt settlement can be an option for borrowers who have been steadily delinquent in payments.

Debt settlement companies will assess a borrower’s entire credit profile and contact creditors directly on a borrower’s behalf for debt forgiveness. Debt relief programs will usually request that borrowers stop payments on their monthly credit bills in order to increase the likelihood that a creditor will settle. Generally most companies will also require clients to make monthly escrow payments toward a lump sum settlement which would be paid at some time in the future.


In many situations, bankruptcy may be the best option for a distressed borrower. In a bankruptcy the borrower has the support of an attorney and the courts. Debt forgiveness is also not considered income in a bankruptcy which can help save tax liabilities. 

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Find a Local Bankruptcy & Finances Lawyer near You 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. 

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

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