Key Takeaways

Debt cancellation happens when a lender relieves you from your debt obligation. You may be able to negotiate with your creditor for forgiveness, file for bankruptcy, or apply for a government program that involves cancellation. Canceled debt is taxable, but there are exceptions to this rule.

What is Debt Cancellation?

Debt cancellation occurs when a lender discharges a debt and releases you from your obligation to repay it. This process is also known as debt forgiveness, and it may happen when you qualify for a government loan forgiveness program, when you negotiate with a lender to settle your account for less than you owe or file for bankruptcy. A lender may cancel all or some of your debt, but you have to pay taxes on the canceled debt to the IRS.

Do You Qualify for Debt Cancellation?

Whether you qualify for debt cancellation will depend on the nature of your debt and the type of debt cancellation method you opt for. For example, if you’re applying for student loan debt cancellation, you may be able to qualify if you work in certain public service occupations or have a particular type of federal student loan.

If you’re applying for credit card debt forgiveness, you may have to negotiate with the credit card company to settle your account. You may be able to qualify for this if you have missed several payments and have enough savings to offer a lump sum payment.

Types of Debt That Can Be Cancelled

Not all debts qualify for forgiveness. For example, you’ll have more luck with unsecured debts when it comes to debt cancellation. When it comes to secured loans, lenders are usually not willing to cancel your debt. In rare cases, you may be able to get some relief through mortgage modification programs. Typically, these are the types of debts that can be canceled:

  • Student loans
  • Credit card debt
  • Medical debt
  • Tax debt

2 Options for Debt Cancellation

There are two main options for debt cancellation: bankruptcy and debt settlement. Each of these options works in a different way, but they may provide you some relief if you’re facing financial difficulties and are finding it challenging to keep up with payments.


1. Bankruptcy

Filing for bankruptcy is one way to receive debt cancellation for some types of debt, but it’s a solution that requires a lot of thought. Chapter 7 and Chapter 13 are the two primary forms of bankruptcy for individuals.

With Chapter 7 bankruptcy, the court may liquidate some of your assets to pay your lenders and will discharge the remaining debts. If you have no assets to surrender, the court may discharge all your unsecured debts.

With Chapter 13 bankruptcy, you’ll have to repay some of your debts through a repayment plan of three to five years. Once you complete the repayment plan, the court will cancel the remaining debts.  

If you’re considering this option, set up an initial consultation with an attorney to explore your options and compare solutions like bankruptcy and debt settlement.

2. Debt Settlement

Another option to consider is debt settlement. If you’ve been unable to keep up with your payments for several months, you can negotiate with your lender to settle your account for less than you owe. You can also hire a debt settlement company to negotiate on your behalf.

If the lenders feel there’s little chance to recover the full amount, they may be willing to settle for less. Lenders may cancel the rest of your debt once you pay the agreed lump sum amount. While it is possible to negotiate with lenders on your own, working with a debt settlement company can ensure you get the best possible settlement.  

Government Programs

Other than the two options listed above, there are several government programs specifically for student loan cancellation. If you have student loan debt, you may be able to qualify for one of these programs.

Public Service Loan Forgiveness

One of the most well-known student loan debt cancellation programs is Public Service Loan Forgiveness (PSLF). If you have Direct Loans, the program can cancel the remaining loan balance after eligible borrowers have made the required qualifying monthly payments.

Here are the qualifying requirements for this program:

  • You must have made 120 monthly payments under a qualifying repayment plan.
  • You must be employed full-time by an eligible employer, such as a U.S. tribal, local, state, or federal government or a qualified nonprofit organization.
  • You must have Direct Loans.

Income-Driven Repayment Plans

If you’re unable to afford your student loan payments, you may want to consider applying for an income-driven repayment plan. Most federal student loans, including Pell Grant loans, are eligible for this repayment plan. Payments for eligible student loan borrowers will be adjusted according to your income, and it could be as low as $0/month.

Depending on the specific program you sign up for, there can be different repayment periods. The program will cancel any remaining balance on the loan at the end of that repayment period. There are four different student loan repayment plans you can apply for:

  • Income-Contingent Repayment Plan
  • Income-Based Repayment Plan
  • Pay As You Earn Repayment Plan
  • Saving on a Valuable Education Plan  

Other Government Debt Cancellation Programs

Other than the two options listed above, there are also several other government debt cancellation programs you may qualify for. For example, if you’re a full-time teacher and have been teaching for five years in an educational service agency or low-income school, you may be eligible for the Teacher Loan Forgiveness Program, which can cancel up to $17,500 of your loans.

You may also qualify for other debt relief programs if you’re a medical professional, have a disability, if you’ve declared bankruptcy, or if you’re a parent borrower. President Joe Biden also introduced a new student loan debt forgiveness program that you may qualify for after the Supreme Court’s decision to reject Biden’s plan that the Department of Education had initially announced in August 2022. In July 2023, the Biden administration canceled student debt for 804,000 Americans. If you’ve been on a repayment plan, you may qualify for it.

How to Choose a Debt Cancellation Service

If you’re planning to work with a company that offers debt cancellation services, it is important to do your due diligence, check reviews, and learn more about the service they offer before you sign up for the program. Always compare your options and read reviews on third-party websites like Trustpilot to check what past clients have to say about their service.

Avoid working with companies that are not transparent about the services they offer, how their programs work, or if they ask for an upfront payment before delivering any services.

Questions to Ask Debt Cancellation Services

Most companies offer debt cancellation services, such as debt settlement and bankruptcy, and offer a free consultation. Book appointments with a few different companies you’ve shortlisted, and use this opportunity to ask relevant questions.

Speak to a representative and ask if they have experience working with clients with a similar financial situation. Ask if they offer programs for the state you reside in. Learn more about how their program works, how much it will cost, and how much of your debt is likely to be canceled at the end of the program. Make sure you’re on board with all the information they share before you sign up for the process.

Staying Informed on Debt Cancellation

Debt cancellation is not always easy to come by, and student debt cancellation programs can change at any moment. If you’re interested in applying for government student debt relief programs, Studentaid.gov is a good place to research. You’ll get current information on student loan forgiveness programs they offer, debt forbearance options, deferment, qualification requirements, and application forms on the website.  

Personal Finance Resources

If you’d like to learn more about personal finance topics such as debt cancellation, other debt relief programs, and money management, there are many good sources of information. Read articles on topics you’re interested in to learn more about the options that may be available to you.

You’ll also find several other personal finance blogs online where you can read more about student loan programs, the latest news from the Secretary of Education and the White House, and other finance-related news, but it’s important to always verify any information you read to ensure it’s authenticity and accuracy.

Credit Score Monitoring

Before you apply for debt cancellation and throughout the process, monitor your credit report to see how it impacts your credit. Every debt cancellation process will impact your credit score in a different way, so it’s crucial you know what to expect before you commit to any program.

Monitoring your credit score will also allow you to spot any inaccuracies and dispute them. It will provide you with the information you need to stay on top of your debt so you can improve your credit score over time and qualify for favorable terms in the future.

Lenders may sometimes cancel all or a portion of your debt if you are facing serious financial challenges. But, it is not always easy to qualify for, and it comes with a tax burden. Your best bet is to consult a professional and evaluate all your options before you apply for debt cancellation.