What Is a Debt Cancellation?

Debt cancellation is a process that involves a creditor choosing to dismiss or cancel a debt owed by a creditor. Depending on the circumstances, this type of cancellation of debt may apply to the entire outstanding balance, or only to a portion. Creditors will sometimes extend this type of service in the event that the debtor passes away, sustains a disability that makes it impossible to earn a living, or even when the debtor experiences a loss of employment as the result of circumstances that are beyond his or her control.

The provisions for debt cancellation will vary, but are usually put in place when a lender or creditor agrees to do business with a customer. One of the more common approaches is the creation of what is known as a debt cancellation contract. With this approach, the debtor pays a fee to the lender or creditor that makes it possible to request the debt cancellation in the event that one or more of the events covered in the terms of the contract should take place. Claiming the benefit usually calls for filing a claim with the creditor and providing verifiable proof that the event has taken place. Once the creditor is satisfied that the event is indeed covered, the outstanding debt is canceled in whole or in part, in accordance with the terms and conditions of the contract.

While debt cancellation is often associated with the dismissal of debts owed by individual consumers, the concept is also employed in other situations. For example, a business may choose to cancel a debt owed by another company, if doing so will provide some type of benefit to both parties. In like manner, a nation holding a debt from another country may, at its discretion, choose to cancel the debt as part of a process designed to strengthen the economy of the debtor nation and possibly lead to a more equitable balance of trade between the two nations.

In most cases, debt cancellation provides at least some benefits to both the debtor and the creditor. The debtor has the benefit of no longer owing the debt, although the dismissal may have at least some negative impact on his or her credit rating. Creditors save the time and money that would have been spent on collection efforts, legal fees, and other costs that are associated with pursuing the repayment of the outstanding debt. In addition, the cancellation of the debt can sometimes be claimed as a tax write-off, a measure that helps to further minimize the amount of loss that the creditor sustains in choosing to extend debt cancellation in particular situations.