Definition

• A debt cancellation agreement is a contract that alters the terms of the original loan for the borrower. This type of agreement occurs when the borrower realizes that there are no longer enough funds to make regular payments on the loan according to the original terms. The borrower goes to the lender, and the lender creates a debt cancellation agreement and forgives the debt based on required actions from the borrower.
  
  

Cancellation

• Sometimes the lender completely forgives the debt using a cancellation agreement. This is most common when borrowers only have small debts. Sometimes the agreement states that the borrower can give a lump sum of a specific amount to the lender (less than the original loan) and the lender will forgive the entire debt. Many loans have an agreement that allows the lender to forgive the debt if the borrower dies.
  
  

Deference

• Debt cancellation agreements are also used to defer payment. This means that the lenders are still expecting payment for the loan, but they suspend the date for a certain amount of time, long enough for the borrower to gather enough funds to resume payment. This is sometimes called a suspension or deferment agreement, but is also known under the general title of cancellation agreement, in part because the lender often cancels a few months of unmet payments.
  
  

Process

• When the borrower comes to the lender with a request for a debt cancellation agreement, the lender looks at the financial documents pertaining to the debt and offers the borrower a system of payment and cancellation that will still allow the bank to recoup its losses but give the borrower a break. Some banks are more flexible with these agreements than others, but all lenders require a fee for the cancellation agreement service, which can put an addition burden on the borrower.
  
  

Regulations

• Debt cancellation agreements are controlled by various state and federal regulations. For instance, lenders cannot require a debt cancellation agreement before they grant a mortgage, and some institutions (such as state-charted entities) cannot create debt cancellation contracts without being subject to state insurance laws.