Sometimes, recouping a debt is not always worth the effort. It may harm the delicate relationships between you and the debtor or may imperil any future business ventures. Under that circumstance, only forgiving the debt seems to be the logical way forward. You have to draft a letter to that effect.
This is called the ‘debt forgiveness letter,’ and it endeavors to inform the debtor that he is no longer obliged to repay the earlier debt he contracted. The letter also goes by the name ‘cancel your debt.’ Apart from notifying the debtor that he is no longer under any obligation to repay the debt, this letter also frees the collateral.
Common Reasons and Causes to Draft this Letter
This letter is mainly drafted in response to the emergence of financial hardships. Common causes of these financial hardships include:
Severe Damage to Property
If and when your property experiences severe damages, the income that arises from it may be compromised. This may impact on your ability to repay a debt.
Obviously, you cannot service a loan while at the same time, serve a jail term. If you are convicted, you will find a nice excuse not to repay your debt.
Military Deployment and Duty
Some military duties require that you detach yourself from your home country or active employment. This again interferes with your ability to service existing debt.
Other than military engagements, some work relocation activities may demand that you detach yourself from your normal places of residence. These, too, impact your ability to service a debt adversely.
Divorce or Death in the Family
When partners divorce or when a partner dies, there is bound to be a loss of income that used to be brought in by the departed partner. This may also warrant dent forgiveness or the inability to keep servicing a debt obligation.
Failed Business Ventures
If a debt was contracted principally to start a business, its repayment will rely heavily on the success of the business venture. The ability to repay the debt may yet again be compromised if the business fails to take off.
Reduced Working Hours
To be able to repay any debt, the borrower has to work to raise the money. Most employments are pegged on the number of hours worked. A reduction in the same may definitely impact the ability to repay severely.
Loss of Spousal Income
Some debts are contracted jointly as a couple. Their repayments hence depend on the contributions that each party rakes in. A loss of spousal income from one party thus has a bearing on the ability to repay that debt.
Personal or Family Medical Bills
Life is never smooth and linear. Some circumstances may arise unexpectedly that impact on the ability of the borrower to repay the debt. Their existence may also impact the ability to repay a debt adversely.
Loss of Personal Income
This is perhaps the single most significant cause of debt defaults. The loss of your own income will no doubt impact your ability to honor your debt obligations severely.
PS: Though these circumstances are understandable and justifiable, the creditor is still under no obligation to honor a debt forgiveness request. The borrower is still obliged to honor his commitment. As such, this letter merely convinces or requests the creditor to consider forgiving the debt.
What should be Included?
It is worthy to note that the letter assumes many shapes and forms depending mainly on the exact circumstances that underlie its drafting. Notwithstanding these variations, a number of steps and contents must exist in each letter. We look at these here below:
Reason(s) of the Possible Defaults
The letter has to contain the reason or reasons for the possible defaults. We have already explained the main reasons that may warrant debt forgiveness above. You only have to be honest with yourself here by not feigning reasons. Doing that may land you in trouble ahead.
Borrower’s Present Financial Status
Next, you should also indicate your present financial status. Here, indicate just how much money you have as well as the ones you have already lost in the process. That is necessary as it will give your lender as accurate a picture as possible about you. Be ready to back those facts with proof.
Present Repayment Capacity
It is not always a given that you shall receive 100% financial debt relief. Thus, you, too, should be ready and willing to make some payments, albeit in part. State this detail also in the letter. Let your lender know just how much of the debt you may be willing to repay.
Proof of Hardship
We have already stated and explained above that you shall have to back your claims or allegations with hard facts. This entails furnishing foolproof evidence of the existence of the issues that may prevent you from repaying your debt in full or in time. They include medical records and bank statements, among others.
Any other viable Alternative(s)
In the unlikely event that you are not granted the full debt relief as you request, what alternatives may you be willing to explore? Are you, for instance, willing to extend to repayment period, accept reduced rates of interest, or repay a portion of the debt instead of the 100% waiver? State those alternatives also for the consideration of your creditor.
The Tone of the Letter
Considering that this is a formal letter, and it dares to invoke the mercy of the lender, the tone has to be polite and respectful. You should never place any signs of anger or wrath, even if you are. Then, remember, the letter is a mere request. You are not entitled to debt relief at all. Use words and approaches that capture and convey those vividly.
DEBT FORGIVENESS LETTER
Your City, State Zip Code
Your Phone Number
City, State Zip Code
Respected Mr. /Ms. Last Name:
Re: Debt Forgiveness Letter
As you know, you owe us a total of $25,000, which you should have repaid three years ago. Our effort to compel you to repay the debt has yielded no viable fruits thus far.
In light of this, and considering the ongoing COVID-19 pandemic, we have taken it upon ourselves to relieve you of the debt fully. It is unlikely that we shall recover our money no matter how much we pursue you.
We have also decided to return the collateral we held in the lien, pending your full repayment of the amount owed. Many thanks for being a loyal customer to us.
We look forward also to transacting business with you.
Signature (hard copy letter)
Sample II: E-mail Version
DEBT FORGIVENESS LETTER
Subject: Debt Forgiveness Letter
Dear Mr. /Ms. Last Name:
[Name of Creditor Organization]
[Your name and address]
Account Number: [insert the account number linked to your debt here]
In consultation with your attorney, we have unanimously decided to cancel your outstanding $300 debt. This is because of the consistency with which you have serviced the $19,000 you borrowed from us two years ago.
On the same note, we would like to congratulate you on your consistency and promise to give you better deals in the future should you require any loan from us.
Having relieved you of your debt obligation, we also ask you to come and collect your motor vehicle logbook, which we took as a lien for the loan.
Kindly contact us via XXX-XXX-XXXX any weekday during the day time.
[Your full name]
Frequently Asked Questions (FAQs)
Not necessarily! If it happens normally or under debt forgiveness programs, it is unlikely to affect your credit score. Nonetheless, if it happens in the event of bankruptcy, it may adversely affect your credit score considerably. You hence have to tread this path wisely.
YES, you may! However, there are certain risks involved in the process. Some creditors will note it and use it against you if you decide to ask them for another debt. Others may choose to list you in the credit reference bureaus.
No less than 30% of the debt would be suitable. Be willing to negotiate with your creditor, though. This also requires that you seek alternative pathways to settle the debt in case you are asked to repay a higher percentage.
You at least know how to go about seeking debt forgiveness. The critical pieces of information we have furnished above are no doubt well able to guide you through the process from scratch through to the finish. All you have to do is read them carefully and adhere to each step faithfully.