Cancellation of Debt - What You Need to Know

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Cancellation of Debt

What you need to know ...

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Having a debt forgiven, discharged or canceled can be a welcome relief for those struggling with debt. You may receive a debt cancellation through a few different methods, including filing for bankruptcy, participating in a debt help program, or reaching out to your creditors. While having a debt canceled can reduce your overall debt, there are some additional considerations that you’ll want to keep in mind, such as taxes and future credit.

What is a Cancellation of Debt?

Debt cancellation is when a creditor or lender forgives some or all of a debt obligation. This means that you’re no longer required to pay the canceled amount, and your creditor will not ask you to pay it back in the future.

Debt Cancellation Methods

Debt can be canceled or forgiven in a variety of ways, including the following:

Debt Cancellation Definitions

There are a few different terms that might be used to describe a debt that you’re no longer responsible for. While they’re almost the same, there are some slight differences.

Debt Cancellation and Debt Forgiveness: This is when a creditor no longer requires you to pay back some or all of a particular debt. You may receive a debt cancellation in the form of debt reduction results achieved by a debt consolidation service or by participating in federal loan forgiveness. Forgiven and canceled debts are considered taxable income, so it’s important to review any of these debts with a tax professional before you file.

Discharged Debt: This term is used when a debt is canceled due to circumstances like bankruptcy and permanent disability. While these debts are often exempt from taxes, it’s a good idea to review any discharged debts with a tax professional.

Charged-off Debt: This is when a creditor takes a debt off of their books and tries to collect on the debt through an in-house collections team or by selling your debt to a different debt buyer. You may still be responsible for paying it back. Charged-off debts are also reported to credit bureaus, which may affect your credit score and your ability to borrow money in the future.

Paying Taxes on Cancelled Debts

While having your debt canceled or forgiven can help to free up your overall finances, you’ll need to keep your taxes in mind. While there are several exceptions, the IRS considers most canceled debts are taxable income.

It’s highly recommended that you consult with a tax expert before and after pursuing debt cancellations. You should also be on the lookout for a 1099-C form from your creditor or lender if your forgiven debt totals $600 or more.

Alternatives to Debt Cancellation

Best Way to Cancel Your Debt

Everyone’s finances are unique, and the best solution for one individual might not be right for another. It’s important to thoroughly research all of your options before pursuing a debt solution or a debt cancellation strategy.

Accredited Debt Relief helps match individuals across the U.S. with customized plans to lower monthly payments by 40% or more and improve their finances. Contact them today for a free consultation to learn more.