Cancellation of Debt - Explained
What is Cancellation of Indebtedness?
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Table of ContentsWhat is Cancellation of Debt (COD)?How Does Cancellation of Debt Work? Negotiating with CreditorsDebt Relief ProgramsBankruptcyAcademic Research on Cancellation of Debt (COD)
What is Cancellation of Debt (COD)?
Cancellation of debt (COD) is an act of relieving a debtor of a debt obligation. It is sometimes referred to as debt forgiveness, when a creditor lets go of debt repayment, thereby relieving the debtor. There are many reasons a cancellation of debt can occur, in most cases, debtors plead with their creditors to forgive their debt. In some cases, debtors file for bankruptcy through a debt relief program so that their debts can be cancelled.
How Does Cancellation of Debt Work?
Distressed or bankrupt borrowers can negotiate with their creditor for debt cancellation or forgiveness. This provides a relief for the debtors as well as economic support for those that are indigent. Debtors can also file for bankruptcy under a debt relief program to have their debts cancelled. In the United States, cancelled debts are taxed under the taxable income of the creditor. The creditor records cancelled debts, these debts are contained as income on a 1099-C for the debtor.
Negotiating with Creditors
Cancellation of debt by a creditor is not an easy thing to come by. Most creditors are unwilling to cancel debts owed by debtors. Typically, creditors generate income through interest payments on debts and well as the repayment of debts, this is why negotiation for debt cancellation can be a daunting task. Some creditors have debts relief provision in credit contracts while some do not have any provision for cancellation of debts. Credit relief services attract additional fees. Generally, some loans issued by the government can be forgiven, debt forgiveness and debt cancellation are often common in mortgage loans, student loans and some other government programs.
Debt Relief Programs
In the United States, there are debt relief programs that borrowers can access to get their debts cancelled. The National Foundation for Credit Counselors is an organization that helps individuals identify the debt relief program most suitable for them. A common practice in debt relief is that debtors will cease paying to creditors, so that they can be at an advantage of getting debt cancellation. Over the years, debt cancellation or forgiveness has benefited borrowers that became bankrupt or delinquent, thereby unable to make debt repayment. Some debtors also seek the service of debt settlement companies to help them negotiate debt cancellation in exchange for a fee. These companies often request an access to the credit profile of a debtor so as to negotiate for cancellation directly with the creditor.
Bankruptcy is a condition that puts debtors on a favorable pitch or at an advantaged side when it comes to debt cancellation. A bankrupt debtor or a distressed debtor can file for bankruptcy under the debt relief program. This individual can also seek the support of the court or an attorney.