What is 'Cancellation of Debt (COD)'

Cancellation of debt (COD) occurs when a creditor relieves a debtor from a debt obligation. Debtors may be able to negotiate with a creditor directly for debt forgiveness. They can also receive debt cancellation through a debt relief program or by filing for bankruptcy. Debts forgiven by a creditor are taxable as income. Cancelled debt will typically be recorded by the creditor and reported to a debtor as income on a 1099-C.

BREAKING DOWN 'Cancellation of Debt (COD)'

Cancellation of debt can greatly help to provide relief for a distressed borrower. In some cases debt forgiveness may also be offered between countries for economic support.

Distressed borrowers can work directly with a creditor to negotiate debt relief. Many distressed borrowers may choose to file for bankruptcy or work with a debt relief program which can lower a borrower’s total debt. When obtaining debt relief borrowers should plan ahead for taxes on potential savings since any income saved from a cancellation of debt is subject to tax and detailed in a 1099-C.

Negotiating with Creditors

Negotiating cancellation of debt with a creditor can be challenging. Most creditors are not willing to cancel individual debts as interest and fees on approved credit is the main source of income influencing their bottom line. However, some creditors do include provisions in their credit agreements for canceled debt. Many creditors also have credit relief services which can be obtained for a small additional fee and used in specific hardship situations such as a job loss or a medical occurrence. Reviewing the credit card terms of all creditors can help a borrower to identify on their own any creditors that they may easily qualify for debt cancellation from.

Certain loans issued under government programs may have a higher chance of debt forgiveness. These loans may include student loans or mortgage loans eligible for debt forgiveness under government sponsored relief programs. For distressed borrowers some lenders may also be willing to negotiate principal reductions on mortgage loans since it could save them some of the costs of a foreclosure.

Debt Relief Programs

Debt relief and settlement companies are available across the nation to help with debt forgiveness. Working with a credit counseling resource such as the National Foundation for Credit Counselors can help a borrower to identify an appropriate program for their situation.

Debt settlement companies are for profit entities that work on behalf of a borrower to negotiate debt settlement with creditors. There are numerous caveats to working with these companies and the process for settlement can take years. However, debt settlement can be an option for borrowers who have been steadily delinquent in payments.

Debt settlement companies will assess a borrower’s entire credit profile and contact creditors directly on a borrower’s behalf for debt forgiveness. Debt relief programs will usually request that borrowers stop payments on their monthly credit bills in order to increase the likelihood that a creditor will settle. Generally most companies will also require clients to make monthly escrow payments toward a lump sum settlement which would be paid at some time in the future.

Bankruptcy

In many situations, bankruptcy may be the best option for a distressed borrower. In a bankruptcy the borrower has the support of an attorney and the courts. Debt forgiveness is also not considered income in a bankruptcy which can help save tax liabilities. 

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