Debt cancellation is a procedure undertaken by most lenders where your debt will be wholly or partially forgiven. It is also meant to stop debt growth. Lenders can also charge-off your debt if they deem it uncollectible.
This involves closing your account for future use, though your debt will not be forgiven. All these can harm your credit report. There are several ways of removing a charge-off from your credit and regain a positive score. You can try them out to avoid being locked out from borrowing in the future. Debt cancellation has lots of disadvantages, which you should avoid.
Consequences of a Debt Cancellation
Debt cancellation can have serious repercussions. Although the financial institution recognizes that it is very difficult to collect the debt in question, that does not mean that you as a consumer are no longer obliged to pay. In other words, you still have outstanding debt, no matter how much it appears as “canceled.”
That’s not all. There are other consequences:
A Negative Impact on Your Credit Score
This is possibly the most serious implication. Your credit score will decrease when your lender reports debt cancellation. How much will your score decrease? That depends, but it can be quite a bit. Remember that your lender first informs you that you are behind in your payments. This damages your credit history when you finally pay off your debt, which hurts your credit score even more.
Debt Cancellation Will Continue to Appear on Your Credit Report for About 7 Years
It is a long time, but unfortunately, there is nothing you can do about it. Of course, if the credit bureau or lender has made a mistake, you can file a dispute.
The Lender Could Sell the Debt to a Third Party
The bank may try to get some of your money back by selling the debt to a debt collection agency. Therefore, a representative who does not work for the financial institution that loaned you the money might contact you to make you pay.
Paying Down the Debt May Not Solve the Problem
This can be very confusing to many. The bank can only be satisfied if you manage to clear your debt in the end. It is normal to assume the cancellation is also deleted from your credit report.
Unfortunately, this is not how it works. After you have paid, your credit report will say “payment made” or “payment canceled” (if you have paid less than originally owed). This will remain on your credit report for seven years.…
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