How to Cancel Debt Legally

If you cancel your debt, you'll need to repair your credit history.

Many Americans struggle with crushing debt, especially credit card debt. When debt reduction strategies and repayment plans fail to work, sometimes the only option that consumers face is debt cancellation. Canceling your debt in most cases will negatively affect your credit.

Things You'll Need

• Income documents (pay stubs, W2s)
• Copies of all account statements

Instructions

1. Pull a current copy of your credit report. See Resources for a free copy. You should also pay for a copy of your FICO score. A FICO is a three-digit number between 300 and 850 that represents your total creditworthiness. Look at your payment history on all accounts. Most creditors will not consider any debt cancellation if you're currently paying well on your accounts.

2. Calculate your debt-to-income ratio. This is a ratio lenders use to determine how much of your monthly income is used for debt payments. To calculate your DIR, divide the sum of all monthly credit-reportable bills by your gross monthly income. Lenders like to see a DIR of at least 55 percent before considering debt cancellation.

3. Negotiate a debt settlement with your lender. You can either do this on your own or with a debt settlement company. Debt settlement is the process by which lenders either eliminate debts or reduce the total amount owed. You'll need to provide your income documents to either your debt settlement agent or your creditors.

4. Cancel your debts on your own through debt settlement. You must be seriously delinquent on your accounts for your creditors to review settlement. Make an offer to cancel part or all of your debts owed. Many companies will counter this offer--you will need to make a good faith effort to repay a part of your debt before any part is cancelled. Make sure to get a contract in writing from the lender prior to agreeing to a settlement offer.

5. File for Chapter 7 bankruptcy protection. This will halt all collection activities (including foreclosure). Chapter 7 bankruptcy will eliminate your debts. The courts will review and liquidate your assets, though. In addition, your credit report will reflect a bankruptcy for at least seven years.

References

• Bankrate: Is Credit Card Settlement a Good Idea?
• Bankrate: 3 Points to Consider in Debt Settlement
• Bankrate: The Skinny on 2 Mortgages in Bankruptcy

Resources

• Annual Credit Report
• FTC: Knee Deep in Debt