What is a Debt Cancellation Contract (CDC)?
A Debt Cancellation Agreement (CDC) is a contractual agreement modifying the terms of the loan. As part of the debt cancellation contract, a bank agrees to cancel all or part of a customer’s obligation to repay a loan or credit. These contracts come into effect upon the occurrence of a specified event as stated in the contract, and most people associate them with credit card debt.
A product in which debt is suspended for a period of time due to extenuating circumstances is known as a Debt Suspension Agreement (DSA). In DSAs, debt payment is not canceled and resumes after extenuating circumstances have passed. Both products are under the control and supervision of the Office of the Comptroller of the Currency (OCC).
Key points to remember
- A Debt Cancellation Contract (CDD) cancels all or part of a loan due to a change in circumstances for the borrower.
- Banks and other financial institutions offer debt cancellation contracts in place of credit insurance plans.
- DCCs place the burden of risk on the issuing body, which often benefits borrowers.
Understanding Debt Cancellation Contracts
A Debt Cancellation Agreement (CDC) provides for the cancellation of loan payments when it becomes difficult, if not impossible, for the borrower to make payments.. These events may include an accident or loss of life, health or income. Other reasons for debt cancellation include military service, marriage, and divorce. Any remaining debt under the loan or credit or agreement is canceled in its entirety.
Banks and other financial institutions will offer debt cancellation contracts instead of a credit insurance plan. Credit insurance is a type of insurance policy taken out by a borrower that pays off one or more existing debts in the event of death, disability or, in rare cases, unemployment.. CDDs act like credit insurance, but can also be written to cover events in the life of the borrower’s spouse or other household members. This feature of the product recognizes that in many households various family members contribute to the total household income.
CDDs offer borrowers a flexible way to protect themselves against a variety of events that can affect their ability to repay their debts. They also allow borrowers to buy only the amount of protection they need based on their financial situation and the amount of outstanding debt. Therefore, Debt Cancellation Agreements (CDCs) and Debt Suspension Agreements (DSAs) are often a more suitable form of debt protection for borrowers than credit insurance.
Credit insurance is typically offered with retail store cards and traditional credit cards, with coverage typically costing a few dollars per month.
Availability and regulation of debt relief products
Debt cancellation contracts are available for consumer loans, including installment loans, auto loans, mortgages, Home equity lines of credit (HELOC) and leases. The borrower pays a fee to a creditor benefiting from the protection provided. Federal banking regulators, federal courts and most states recognize CDCs as banking products because they lack the attributes of insurance.
DCCs are available from federally and state chartered depository institutions as well as non-depositing creditors. DCCs are fully regulated by federal and state banking regulators. DCCs can arise either from the underlying credit transaction or after the closing or establishment of a loan or line of credit.
The transfer of risk inherent in credit insurance requires regulation of the product as insurance. This regulation protects the bank in the event of insolvency. However, the same collateral is not present with a debt cancellation product.
With a DCC, the creditor retains all risk of cancellation or suspension of payment. In addition, CDC does not sell through insurance agents, brokers or other intermediaries. They are a feature of Extending Credit, provided by a lender that the customer can cancel at any time. Banks and auto agencies offer debt cancellation agreements, instead of insurance, in exchange for fees and a deductible.
Gap Insurance, which is often required for high cost vehicles that depreciate quickly, is a form of debt cancellation agreement.
Sample debt cancellation agreement
Debt cancellation agreements may differ by state and jurisdiction. For example, the Texas State Office of Credit Commissioner (OCCC) specified contractual requirements for debt cancellation agreements provided by auto agencies to consumers. Among the more attractive requirements is the fact that the buyer takes out home insurance for the vehicle while it is under their ownership. Generally, DCAs are considered an alternative to insurance. However, the insurance requirement relates to the depreciation in the value of the automobile.
If you have a complaint or concern about a debt cancellation product, the Office of Consumer Financial Protection suggests contacting your insurance department or commissioner.
If you are having trouble paying off your debts
When you are having difficulty with auto loans, credit cards, or other types of debt, and debt cancellation is not an option, it is important to consider all of the options available to you. Seeking debt relief, for example, may allow you to take advantage of things like debt settlement or debt consolidation for the management of outstanding obligations.
If you are considering using a debt relief company, it is important to do your research first. The best debt relief companies generally have reasonable costs and a solid reputation for excellent service. Taking the time to compare the services offered and the fees you can afford can help you choose a reputable company to work with.
Before hiring a debt reduction company, check with the Federal Trade Commission, the Consumer Financial Protection Bureau, and the Better Business Bureau to see if any complaints have been filed against it.