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What is Cancellation of Debt?

Tricia Christensen
Updated May 16, 2024
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Cancellation of debt refers to the complete absolution of debt, which may be granted to individuals, businesses or even countries under a variety of circumstances. For most individuals, debt to credit card companies or other businesses can be canceled if a person files for bankruptcy. Filing for bankruptcy doesn’t necessarily result in cancellation of all debt. People with hefty student loans may still be obligated to repay them even after bankruptcy is filed.

Sometimes certain types of debt have cancellation of debt policies. For instance credit card companies may sell insurance that would allow you to cancel debt under extreme circumstances, like the loss of a spouse, total disability, or job loss. More often, a credit card company will step in and make minimum payments for you if any of the above events occurs, and you will eventually have to resume making payments once your circumstances improve.

Some mortgages also have debt canceling policies, and in the wake of the numerous foreclosures occurring in the 2000s due to poor lending practices, some mortgage companies have offered debt cancellation so that if a person sells a home for less than they owe, they are not responsible for paying additional money on the mortgage. Reading your mortgage policy carefully is the surest way to find out under what circumstances, if any, cancellation of debt would be offered.

Occasionally individuals may also qualify for debt cancellation on student loans. More often, they’re allowed to defer repayment if they have financial troubles. Under some circumstances, such as being able to prove total disability, loan repayment obligations can end. These are rare circumstances. On the other hand, individual student loans are the responsibility of a single person.

If a spouse with a student loan dies, the surviving spouse is usually not obligated to pay back the loans. They are immediately subject to cancellation of debt. There are exceptions here, too. If parents take out a parent loan for their child, both parents may be responsible for repaying the loan and this is unaffected by the death of a spouse.

A common topic in politics, especially in countries that lend significant amounts of money to poorer countries, is whether debt cancellation might be considered. Sometimes a very poor country has no way of achieving economic stability while debts remain, and the debts become a continual weight that keeps the country from economic recovery. Under these circumstances, the lending country may offer cancellation of debt, so that the poorer country has an opportunity to start fresh, and keep or invest whatever profits they can make, or use these for the benefit of the citizens of the country. Cancellation of debt for other countries might also be considered in the wake of disastrous or cataclysmic events.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Tricia Christensen
By Tricia Christensen , Writer
With a Literature degree from Sonoma State University and years of experience as a SmartCapitalMind contributor, Tricia Christensen is based in Northern California and brings a wealth of knowledge and passion to her writing. Her wide-ranging interests include reading, writing, medicine, art, film, history, politics, ethics, and religion, all of which she incorporates into her informative articles. Tricia is currently working on her first novel.

Discussion Comments

By anon155548 — On Feb 23, 2011

We received a form 1099-C this year from the original creditor on an over 10 year old debt. I included it in my taxes but have not filed them yet. Yesterday I received a letter in the mail from them telling me that they sent me the 1099-C in error, that I was to disregard it, and that it had not been turned into the IRS. What do I do now?

By Amphibious54 — On Jul 21, 2010

The federal government offers debt relief for student loans if the student enters a career in public service. After the student makes 120 payments toward any William D Ford direct student loan, the federal government will forgive the student's remaining debt. The only requirement is that there were no defaults on the loan, and a qualified public service agency employed the student full-time.

By chicada — On Jul 21, 2010

@ Cleaver1214- That sounds like a very messy situation. I would say the best option would be to talk to a lawyer that deals with bankruptcy debt relief. There are online lawyer referral services that will give you resources for these types of lawyers. Most lawyers will offer a free consultation to let you know whether they can pursue the case or not. You also might want to try a legal advice hotline. There are non-profit organizations that may be able to give you a clue about what types of laws the bank is breaking.

By cleaver1214 — On Apr 23, 2009

In 2003 I filed Chapter 13. In 2007 my mortgage company who held my 2nd mortgage randomly sent me a 1099-C canceling the debt. The bk court kept sending them payments. I have print outs where they applied the monies in buckets like "corporate fund advance"; "late fees"; "NSF fees" etc. Then the print outs stopped, but they keep taking the monies from the court.

Now I'm getting ready to be discharged and they have been scrambling for 5 weeks to straighten out their books. They've acknowledged the cancellation of debt, but say they can still collect the payment; but cannot pursue the payments 'legally'.

I want to refinance but they have a lien on my deed, can they 'legally' keep the lien on the deed? Didn't they commit bankruptcy fraud by collecting payments on a canceled debt?

Get this, they sent me a 2nd 1099-C for June 2008, but then quickly sent a letter stating that it was in error and they fully expect me to pay off the loan. What is going on with this company??

Tricia Christensen

Tricia Christensen


With a Literature degree from Sonoma State University and years of experience as a SmartCapitalMind contributor, Tricia...
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