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Debt Cancellation/Relief

What is Cancellation of a Debt?

Cancellation of a debt is very much what it sounds like. When a debt is cancelled, then the debtor is completely released from their debt, and no longer needs to make further payments. 

Debt cancellation usually occurs after a lender and a borrower reach an agreement, such as when a bank agrees to release a person from their mortgage debt. However, cancellation is not just limited to agreements between banks and individuals. Cancellation of a debt can happen in any circumstance when money is owed, whether it involves banks, individuals, businesses, or a combination of those. 

What is a Debt Cancellation Agreement?

A debt cancellation agreement is basically a contract that outlines the agreement between the lender and the borrower. It details the terms for the release of the debt. To be valid, the written debt cancellation agreement has to satisfy the requirements for a valid contract under the laws of your state. 

This often requires that the agreement be in writing; you should not rely solely on oral promises or agreements. It is in your best interests to get the cancellation agreement in writing so that it is legally enforceable.

Debt cancellation agreements can be extremely useful in circumstances where other methods fall short. For example, declaring bankruptcy may wipe out certain debts, but it does not automatically result in the cancellation of others, like student loans. The borrower may need to negotiate directly with their student loan provider if they wish to have their student loans cancelled. The borrower will need to send the lender a debt cancellation agreement to sign, if the lender agrees to the new arrangement.

Sometimes, debt cancellation agreements are provided by the lender in a standardized document. In other cases, the original document detailing the terms of the loan may contain a provision that discusses whether cancellation may be an option in the future. If it is, the agreement should also state under what circumstances it is available.

In most cases, the debt cancellation agreement will need to be drafted by the borrower and presented to the lender for their agreement and signature. The agreement can take a few different forms, but the most common form is a contract stating that the lender will release the borrower from the debt. 

Why Would a Lender Agree to Debt Cancellation?

There are several reasons a lender may be persuaded to agree to a debt cancellation. Generally, there must be a good reason for the lender to cancel or forgive the remaining debt. These can include death, disability, bankruptcy, or the destruction of the collateral. However, even these circumstances do not guarantee that a lender will agree to a debt cancellation.

What Information is in a Debt Cancellation Agreement?

It's probably in your best interests to have your debt cancellation agreement drafted in writing and reviewed by a lawyer before you sign anything. In order to make sure that the document is legally binding, it must include certain information (like the information that creates a valid contract).

For example, the agreement should at the very least contain:

  • The names of the parties involved, such as the lender, the borrower, and any witnesses (if necessary);
  • The exact monetary amount that is owed by the borrower;
  • The exact amount that is being forgiven under the agreement;
  • The date that the money was lent (in many cases, this will be the date of the promissory note); and
  • The date that the cancellation agreement will be effective.

The agreement should also be signed and dated by all parties. Depending on your state, you may also have to have the document notarized. Once the agreement has been finalized, accepted, and signed by both the lender and the borrower, the agreement becomes a legally binding agreement. 

The lender can no longer attempt to collect on the debt that was cancelled as a part of the cancellation agreement. However, if the lender does make further attempts to collect the debt, the cancellation agreement can be used as evidence that the borrower no longer owes this debt. 

Something else to consider is whether the cancelled debt will still come back to haunt you. In many cases, canceled debt is still recorded by creditors, and reported to the borrower as income on federal tax forms. You might be required to pay tax on the canceled debt, so keep that in mind and try to plan ahead.

What is Debt Relief? 

Debt relief, also called debt cancellation, is the total or partial cancellation of a debt. It is what it sounds like, relief from a debt owed. In many cases, it is a credit debt relief from an individual's high credit card balances.

In some cases, debt relief provides individuals with much needed help getting out from under their debt. In other cases, it does not go as planned, and may be seen as a mistake.

It is important to note that beginning the process may severely damage an individual's credit score. It may take 7 years or more to restore the debtor's credit. Even the best debt relief program cannot fix a damaged credit score. This may prohibit the individual from applying for additional lines of credit, such as credit cards or mortgages.

It is also important to note that debt relief is not a fast fix to eliminate debt. An individual must wait several months before even beginning the process. Then, they must negotiate with creditors to settle the debt, if the creditor will accept their offer.

How Does Debt Relief Work? 

In most cases, debt relief or debt settlement begins by the debtor failing to pay their monthly payments, usually for 6 months of more. At the most basic level, the debtor then offers their creditors a lump sum payment, usually much less than what they actually owe, in order to settle the debt. 

If the creditor believes they will not be able to receive any more money from the debtor, they may be willing to accept the offer. In other cases, they may turn the debt over to a collections agency or sue the debtor for the amount owed.

If an individual cannot make any payments at all towards their debt, debt settlement may not be an option. The debtor must be able to pay a lump sum in order to negotiate the debt relief, usually 25% of the debt owed.

Debt Relief Programs in New York

If you need debt relief in New York, credit counseling agencies (nonprofit and for-profit), banks, credit unions and online lenders specialize in helping consumers pay off credit card debt, but offer very different approaches to solve your problem.

There are numerous debt relief programs and debt relief companies that offer debt relief assistance to consumers. They may also be known by names such as American debt relief companies and debt settlement companies. 

Before an individual decides to work with a debt relief company, they should research the company to determine whether there are any consumer complaints and if the company is required to be licensed in the individual's state of residence. 

It is important to find out what services the company provides, how much it costs, and how long the process will take. An individual should get as much information as possible in writing and make sure to read carefully any and all documents provided by the company.

There are no government debt relief programs or federal debt relief programs that forgive or even minimize an individual's credit card balances. There are, however, non-profit consumer credit counseling services that assist individuals with debt relief. These services are funded by grants from credit card companies.

What are the five programs offered in New York? 

The five programs offered in New York include debt management programs, debt consolidation loans, debt settlement, nonprofit debt settlement and bankruptcy. Each program has plusses and minuses to consider.

Here is an outline for each program and why it might work for you:

Debt Management

Debt management programs in New York reduce the interest rate on credit card debt to somewhere around 8%. The average interest rate on credit cards is 16.7% (March 2022), but if you miss a payment, the rate can jump to 20%-25%. Miss two payments and the rate can go up again to 25%-30%.

So, if you owe $5,000 on credit cards and reduce their interest rate from 25% to 8%, the interest payment drops from $105 a month to $33. That's $72 a month you can use to pay off your debt faster. Counselors at nonprofit credit counseling agencies factor your income and expenses and calculate an affordable monthly payment to eliminate your credit card debt.

Another plus: Your credit score is not a factor for enrolling. You can be debt-free in 3-5 years if you make on-time monthly payments, and you may even pay the debt off early. If you don't like the program, you can quit, though that means the credit card company will take back the interest rate concession and you're back to paying 20%-30%.

Plans are offered by nonprofit credit counseling agencies, who work with creditors to reduce interest rates and monthly payments to a manageable level. The program covers unsecured debts, like credit cards, but not secured debts, like houses or cars.

Anyone in New York with high-interest credit card debt would be helped by this program. It lowers interest rates and it chips away at the amount owed until, in 3-5 years, you are free from the debt.

Debt Consolidation Loans

A debt consolidation loan (DCL) is one big loan New Yorkers use to pay off all debt on multiple credit cards. You make one monthly loan payment to the bank/credit union instead of 3-4 credit card payments. The interest rate depends on your credit score and whether you are willing to put up collateral, like your home or car, to back the loan.

Typically, people put up collateral and pay around 10%-12% for a DCL, compared to the 25% they likely are paying to credit card companies. This is a single payment to a single entity, at a lower interest rate that saves money and simplifies payments. It's a big savings, which makes this look like a really good deal. And it can be.

However, New York consumers still owe the same amount to a bank. If you don't stop using your credit cards, you must pay the debt consolidation loan and whatever you're buying on credit cards. And that's if you qualify (poor credit score could eliminate you) in the first place.

Most banks, credit unions and online lenders offer debt consolidation loans. Search for the lowest interest rate and repayment terms.

It's a wise option for anyone in New York with a good credit score (670 or higher) and the discipline to stop using credit cards. Generally, consolidation loans offer a lower interest rate than the onerous and burdensome rates charged by credit card companies.

Debt Settlement

Debt settlement allows New York consumers to settle the debt for less than what is owed. The payment usually is made in a lump-sum and comes after 2-3 years of saving for the lump sum and negotiating with one or more creditors to get them to agree to this.

As good as this sounds, it can be a long process, and it damages your credit report for seven years. Also, the IRS considers forgiven debt of more than $600 as income that must be declared on your tax return.

It works like this: You or a company you hire, must negotiate a payment amount agreeable to your creditors. You stop sending even minimum payments to the card companies, which means late fee penalties and interest are added to what's owed. Instead, you pay into an escrow account. When that account gets big enough, the company doing the negotiating attempts to reach an agreement with the creditors. Be aware: Card companies do not like this form of debt relief and some refuse to deal with debt settlement companies.

While debt settlement companies like to brag that they can cut your credit card debt in half, that doesn't account for their fees and late payment penalties and interest on their accounts. The benefit to the credit card company is that it receives some money, as opposed to little or nothing if you default.

For-profit companies specialize in this service. They negotiate on your behalf with the credit card companies, who must agree to the plan before it goes forward. The process usually takes 2-3 years and card companies are under no obligation to accept settlement offers.

Anyone in New York with large amounts of debt who is desperate for a solution so they don't have to declare bankruptcy should consider debt settlement. If you have $50,000 in credit card debt – two million American consumers do – getting it knocked down to $25,000 sounds pretty good.

Nonprofit Debt Settlement

Nonprofit debt settlement is a new program created by nonprofit credit counseling agencies and the lure is the same as traditional debt settlement – New York consumers will pay only 50%-60% of what they owe. How that happens is completely different from for-profit debt settlement companies.

Instead of long negotiations, the lenders agree to the terms upfront. Rules that must be followed include the consumer hasn't made a payment in 180 days, and must agree to make fixed payments for 36 months. You can pay off early, but there are no extensions and all payments must be made on time or the program is canceled.

The benefit to the consumer is that there is 0% interest charged during the 36-month repayment time.

The program started in 2021, so only a few nonprofit credit counseling agencies offer the program and only a few credit card companies and banks participate. Nonprofit credit counseling agencies are certified and accredited by the National Foundation for Credit Counseling. Federal law requires the agency act in the client's best interest.

This is for New Yorkers who face overwhelming credit card bills but lack the income to pay them off. You won't have to pay any interest on the debt, as long as you keep up with the 36 monthly payments it takes to get through the program.


Bankruptcy is painful, but for some New Yorkers, it might be the best solution available. It gives you a second chance to get your finances in order, and can be done without losing many of your possessions, including your home.

There are two major types of bankruptcy, Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, non-exempt assets are sold by a trustee appointed by the court and the money is used to pay off debts. Key assets are exempt from this process, notably your home, car, personal items needed for work, pensions and Social Security.

In Chapter 13 bankruptcy, you keep your assets in exchange for making regular payments to the trustee to pay down debt over a 3-5 year span.

The consequences for bankruptcy are significant. Your credit score may drop 100-200 points. Bankruptcy stays on your credit report for 7-10 years, making it more difficult to get credit for a home or car loan in the future.

Bankruptcy attorneys in New York are a must to get through this process successfully. He or she knows the ins and outs of the system and can protect you, your family and your assets throughout the process.

Look at your income and expenses. If you can't figure how to pay off all your debts in five years, bankruptcy might be the best debt-relief option available.  It's always best to try nonprofit counseling, debt management, debt settlement or debt consolidation before bankruptcy, but if those are not for you, bankruptcy is the final resort.

Statute of Limitations in New York

Thanks to a law passed in 2021, the statute of limitations of debt in New York is three years, which means that's how much time a debt collector has to file a lawsuit to recover the debt through the court system. The statute of limitations used to be six years. The law also requires that a notice be mailed to the defendants in consumer credit actions by the clerk of the court, ensuring that defendants are given notice of the lawsuit.

Debt Collection Laws in New York

New York law prohibits creditors (and their agents) from telling your employer the nature of your debt before obtaining a judgment against you; threatening to take an action that it cannot undertake; threatening to collect a fee more than the debt you owe, communicating with you in a way that simulates a judicial process or appears to be authorized by a governmental entity', or contacting you or a family member so frequently or at such odd hours that it constitutes debt collection harassment.

Should I Talk to a Lawyer About Issues with a Debt Cancellation Agreement?

If you find yourself having trouble with issues recording a debt cancellation agreement, it is in your best interests to talk to an experienced credit lawyer and get some sound advice. A qualified lawyer can help you draft or review the agreement, and discuss with you the pros and cons of signing such an agreement. 

If you are finding yourself facing a lawsuit that involves a cancellation agreement, your lawyer can advise you on the best course of action and even represent you in court, if needed.

Can a Credit Counselor Help Me Get out of Debt?

Some credit counselors can be quite helpful for consumers looking for a way to pay off all of their debt. However, there are other credit counselors who are not the charitable organization that they seem, and may even leave their customers in a worse position than they were in before they came for help.

Are There Any Self-Help Solutions to Decrease My Debt?

There are many self-help solutions that could can help you pay off your debt:

  • Determine how much money you earn and how much money you spend by listing all your income sources and listing all your “set” expenses that you incur each month.
  • Develop a monthly budget that would help you take control of your financial state.
  • Contact your creditors and work out a modified payment plan that makes your payments more controllable.
  • If a repayment plan cannot be made with you and your creditor, consider contacting a debt relief service or credit counseling to get other options and advice.
  • Avoid using credit cards whenever possible.

However, if you feel that you are in over your head and need the help of a credit counselor, be sure to look out for the red flags associated with these programs before enrolling.

Researching Potential Credit Counselors

If you should see the following elements in a potential credit counselor, you may want to keep looking or find another way to strategize payment of debt:

Debt Relief Services – Before you enroll in a debt relief service, be sure to check with your State Attorney General & Local Consumer Protection Agency to view any complaints that have been filed with the Debt Relief Service you are considering to enroll in.

Do Your Homework – Find out what kind of services the Debt Relief Service provides, how much the program costs, the timeframe for positive results, all fees associated with the program.

Fees – Determine all the fees that the Debt Settlement Company will charge you for the services and whether the fees are manageable for your financial situation.

Disclosure Requirements – Before enrolling, the debt relief company must disclose all necessary information to you about the program and must explain all the fees and conditions on its services.

Non-Payment – If the debt relief company tells you to stop making payments to your creditors, the company must also explain to you all the possible consequences that could result in this non-payment action.

Red Flags to Look for in Credit Counselors

When shopping for a Credit Counselor, be sure to avoid any debt relief organization that:

  • Charges you any fees before it settles your debt or enrolls you into their program
  • Requests you to make any voluntary contributions.
  • Does not provide you with any information about the services it provides or any fees associated with the program's services.
  • Tries to enroll you in the Debt Relief Program without reviewing your financial situation or give you other options in budgeting and managing your debt.
  • Requests that you make payments to their Debt Relief Program before your creditors have approved you into the program.

Seeking Legal Help

You may want to contact an attorney who has experience in consumer credit. Your bankruptcy attorney will be able to advise you of your rights and let you know what your credit counselor should have disclosed to you from the beginning. Your attorney will also be able to let you know if you may be entitled to compensation in a lawsuit against the credit counselor.