What is Cancellation of Debt?

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.