For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.


Debt Cancellation – 2022 Laws

debt cancellation

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

You may have heard about how it’s possible for creditors to write off a borrower’s debt.

If you’re a borrower, you might want to learn about debt cancellation, how it happens, and what it entails.

I’ve written this guide to help you understand everything you need to know about debt cancellation.

Let’s get started.

What Does it Mean to Cancel a Debt?

To put it simply, when a creditor relieves a debtor of his obligation to pay debt, the procedure is referred to as debt cancellation.

Usually, a debtor requests a creditor to cancel the owed debt and the creditor then either accepts the request or doesn’t.

There are multiple ways to have a debt cancelled, such as negotiation with the creditor, insolvency programs like bankruptcy, or even debt relief programs.

Once a debt is cancelled, it is typically listed as income sent from the creditor to the debtor.

If you’re distressed and don’t know how you could possibly repay your debt, it may be time to consider debt cancellation.

Whether you do that by negotiating with your creditor or through an insolvency program is up to you, but I’ll give you pointers for each option you have at your disposal.

debt cancellation

How Does Debt Cancellation Affect Your Taxes?

You’ll be required to pay taxes on any debts of yours that are cancelled.

The reason behind this is pretty simple. Once your debts are written off, they’re classified as taxable income, and just like other, regular forms of income, are taxed.

That’s why if you’re looking to get your debt cancelled, don’t think you’ll be free from all payments once the procedure is done with.

Do analyse how much you’re likely to owe on the debt so you’re mentally prepared once you do have to pay tax on the debt amount.

Why Would a Creditor Cancel a Debt?

As for what incentive your creditor could possibly have to cancel your debt, there’s actually a few solid reasons why your creditor will be willing to cancel your debt.

Firstly, when you negotiate as clearly and honestly as possible with your creditor, chances are they’ll understand your predicament and acknowledge that it’s very unlikely that they’ll be getting any repayments from you.

In such a situation, they determine that it’s better to consider writing off the debt and move on to other ventures.

Secondly, if you’re able to show them that you don’t have any assets you can use to contribute to repayment, they might see that there’s no point in dragging the whole process out and possibly wasting their money.

Thirdly, if you’ve shown them it isn’t worth their while to pursue you for repayment, they’ll consider either forgiving the debt, or, more realistically, agreeing to back off for a specific period of time to let you get back on your feet.

How to Cancel a Debt?

Pay Back in Instalments (Debt Management Plan)

A Debt Management Plan isn’t exactly meant to cancel your debt.

What it is meant to do, however, is to allow you the opportunity to agree to a partial relief program that makes it easier for you to repay your debts.

It usually involves monthly repayments as instalments that you pay over a specified duration.

Also, it offers a unique advantage because your provider will assist you in getting a good deal, negotiating with your creditors, and possibly negotiating a reduction in the total amount you have to pay.

Individual Voluntary Agreement

An IVA is a legally binding arrangement that allows you some freedom over your assets and other financial matters.

It allows you to pay back what you can afford to repay over a period of around five to six years.

If the IVA expires and you still haven’t been able to pay back your debt in full, whatever is left is cancelled and you’re no longer obligated to pay it.

The only problem is that an IVA has rather strict conditions for qualification.

An IVA will only be valid if the creditors that you owe three fourths of your debt to agree to the arrangement.

Explore Income Opportunities 

Something you should definitely be doing as you attempt to get your loans written off is to explore new income opportunities.

Remember, once you get your debt written off, you’ll still have to pay taxes on your debts, so start looking for sources of income as soon as possible.

Remember, it was financial fragility that led you to this situation, so once you get a second chance after cancellation, don’t repeat your mistakes. 

Look into a career in freelancing, pick up a side hustle, work an extra shift at your job, sell things that you don’t need, just get back on your feet as soon as possible.

Negotiate with Your Creditors

I cannot overstate how important this is when you’re looking to get your debt payments reduced or written off.

The key is convincing them that you can’t pay them back at all in the present.

Once you’re able to convince them that you can’t afford your debt repayments, there’s a good chance that they’ll be willing to cancel your loans, or at least agree to a lower interest rate on your debt payments.

Most people will realize that pursuing someone who doesn’t have much of anything will cost them a lot more money than they’re likely to get out of it.

Debt Relief Order

A DRO is another prominent insolvency measure that people use in a pinch.

Here’s how it works: the court grants you a full year where your creditor or debt collection agencies cannot pursue you for debt payments.

The procedure basically grants people one year to get back on their feet and figure out how to make payments regularly.

If the DRO expires and you’re still unable to repay your loans and make debt payments, your loans are officially cancelled.

Consider Bankruptcy 

The last debt cancellation option I’ll be discussing here is bankruptcy.

Once you file for bankruptcy and it’s accepted, all your existing debt is written off and any assets you own are seized from you, and subsequently used to contribute to your debt payments.

The great thing about bankruptcy is that it gives you a great opportunity to start fresh and unburden yourself from loans that you’re simply unable to pay.

The bad news is that bankruptcy comes with a set of severe financial restrictions and does quite a number on your credit score.

FAQs – All You Need to Know About Debt Cancellation

Can I go to prison for debt?
No. While you can’t go to jail for simply being unable to pay your debts in the UK, you can be jailed if it can be proven in court that you’ve knowingly committed fraud related to your loans.
Why can’t I cancel debt with loans?
If it was that simple, debt wouldn’t be a major issue all over the world. Debt cancellation is a complicated procedure. If you’re looking to keep borrowing more and more to repay older debts, drop the idea. It may sound like a good option, but once you keep borrowing and start having trouble with your repayments, your credit rating will be severely affected, meaning that lenders and borrowers will be unlikely to give you loans in the future, or give them to you at very high interest rates. Also, the more loans you take, the more interest you’ll have to pay back. It’s probable that it’ll build up and become extremely hard to repay at some point.
How long before debt gets written off in the UK?
For most loans, the limitation is a period of six years after your last payment or the last time the debt was acknowledged by your creditor. For some loans, such as home mortgage loans, the limitation period is twelve years.
What is debt service?
It is the amount of money needed to repay the interest and principal amount on a loan for a specific period of time. The debtor is required to calculate the monthly or annual amount required on each individual loan.

Wrapping it Up

Debt cancellation can look more intimidating than it actually is if you’re ill-informed of the details and the options you have at your disposal.

We’ve covered the various types of debt cancellation mechanisms in the UK, discussing the protocols and details of each in the process.

We hope this guide helped you understand the process in a better way.


Are you struggling with debt?
Are you struggling with debt?
  • Affordable repayments
  • Reduce pressure from people you owe money to
  • Stop interest and charges from soaring