How to Remove Cancelled Debt from Your Credit Report

Negative line items, like late payments, ongoing debt, and missed payments can all drag down your credit score and prevent you from qualifying for high-quality loans or credit card offers. But in some cases, debt that was previously canceled by your lender can stick around on your credit report, causing even more damage.

Removing canceled debt from your credit report involves filing a dispute letter with one or more of the big credit bureaus and informing them of the problem. Let’s take a closer look at what canceled debt is, why it might stay on your credit report, and how to fix the issue once and for all.

What is “Canceled Debt?”

Canceled debt is any debt that has been partially or totally forgiven by the lender/original creditor.

For example, say that you take out a loan for your vehicle, but are unable to pay back the loan in its entirety on time. Through a debt repayment program with the lender, you work out an agreement where you plan to pay the lender as much money as you can afford in two weeks in exchange for them forgiving the rest of your loan amount. 

After you pay the lender as much as you can, they “cancel” the rest of the debt.

When a debt is canceled, the lender can't try to reclaim it from you in the future. The lender should also tell the credit bureau(s) that it reports to about the change in debt status.

Lenders – such as banks, credit unions, auto lenders, and so on, in addition to utility companies – are "credit furnishers." That means they provide the credit bureaus with information about customer payments and debts.

When a lender cancels a debt, they have a responsibility to tell the credit bureaus that the debt is canceled and that they’re no longer pursuing it. Canceled debt is beneficial because:

• It doesn’t negatively affect your credit report

 (except in the case of bankruptcy, in which case your debts might be canceled, but the overall bankruptcy situation still has a negative effect on your credit report)

• You don’t have to repay the debt and can use your money for other purposes

Canceled Debt Example

Some of the best examples of canceled debt are income-driven student loan repayment plans offered by the US Department of Education. Students who use these plans have 20 to 25-year repayment terms. After those terms end, the borrowers don't have to pay back any remaining debt – it's canceled by the federal government. 

Canceled Debt vs. Charge-Off Debt

Canceled debt is very similar to charge-off debt, but they're two different things. Charge-off debt is debt that a lender no longer expects to collect but will gladly still accept money for. Because of this, charge-off debt still has a negative effect on your credit report, though not as much an effect as debt the lender is still actively pursuing.

In contrast, you don’t have to pay canceled debt, nor does the lender expect to recoup any money for that debt at all. It’s better to have canceled debt compared to charged-off debt.

What if Canceled Debt Stays on Your Credit Report?

Like almost all debts, canceled debts leave your credit report after seven years. But up until that point, they’ll still be visible as line items, even after they’re canceled. Canceled debts just have the “canceled” qualifier next to them to inform the credit bureaus of their status (i.e., that the lender is no longer trying to reclaim the debt).

That said, if you know a debt has been canceled, but it still shows up on your credit report as “regular” debt, you need to clear up the confusion ASAP. In the eyes of the credit bureaus, it’s debt you still have to repay, so it will continue to negatively affect your credit score.

Confirm That the Debt was Canceled

To correct a canceled debt issue, start by calling the creditor or lender and confirming that the debt was indeed canceled on their end. 

Say that you were informed that one of your business loans was canceled in exchange for a lump-sum repayment plan. Before disputing the issue with the credit bureaus, call the lender and make sure they furnished the credit bureaus with the updated information. If they haven’t, wait a few days and check your credit report again. 

Write a Credit Dispute Letter

If the debt was canceled by your lender or creditor, identify which of the credit bureaus you need to contact. The credit bureaus include Experian, Equifax, and TransUnion. Each produces a separate credit report, so be sure to check each credit report to see whether the incorrect debt is present.

Once you’ve identified which credit bureaus you need to contact, write a credit dispute letter by downloading templates online and filling out the key information, including:

• Your name
• The name of your credit report
• Your address
• The issue at hand

In addition, be sure to provide the credit bureaus with supplementary information to prove that your debt was canceled, such as a letter from the lender stating the debt was canceled.

Wait for a Response

Once you send in your letter to the credit bureau(s), you’ll need to wait between 15 and 45 days on average for a response while the bureau(s) investigate. They’ll contact the credit furnisher in question and confirm that the debt is canceled before updating their records.

When Can Canceled Debt Be Marked Incorrectly Your Credit Report?

Canceled debt might be marked incorrectly on your credit report for a number of reasons, including:

• The credit furnisher/lender forgot to contact the credit bureaus they report to
• The credit bureau made a mistake with its records
• The debt wasn’t actually canceled

Wrap Up

You can't fully remove canceled debt from your credit report until seven years pass. But you can correct a negative line item and get debt properly marked as "canceled" if your lender has already forgiven it. File a dispute letter with the right credit bureaus, and your credit score should get back to the right rating in a matter of weeks.