What Is a Debt Cancellation Contract (DCC)?
A debt cancellation contract (DCC) is a contractual arrangement modifying loan terms. Under the DCC, a bank agrees to cancel all or part of a customer’s obligation to repay a loan orcredit. These contracts become effectiveupon the occurrence of a specified event as written into the contract, and most people connect them to credit card debts.
A product in which debt is suspended for a certain period of time due to extenuating circ*mstances is known as a debt suspension agreement (DSA). In DSAs, debt payment is not canceled and is resumed after the mitigating circ*mstances have passed. Both products fall under the control and oversight of the Office of the Comptroller of the Currency (OCC).
Key Takeaways
- A debt cancellation contract (DCC) cancels all or part of a loan due to a change in circ*mstances for the borrower.
- Banks and other financial institutions offer debt cancellation contracts in place of credit insurance plans.
- DCCs place the onus of risk on the issuing agency, which often benefits borrowers.
Understanding Debt Cancellation Contracts
Adebt cancellation contract (DCC)provides for the cancellation of loan payments when it becomes difficult, or impossible, for the borrower to make payments. These events may include an accident or the loss of life, health, or income. Other reasons for debt cancellation include military service, marriage, and divorce. Any remaining debt left under the loan or credit or agreement is canceled in its entirety.
Banks and other financial institutions will offer DCCs in place of acredit insuranceplan.Credit insurance is a type of insurance policy purchased by a borrower that pays off one or more existing debts in the event of a death, disability, or in rare cases, unemployment. DCCsact like credit insurance but can also be written to cover events in the life of the borrower’s spouse or other household members. This product feature recognizes that in many households, various family members contribute to total household income.
DCCs provide a flexible way for borrowers to protect themselves from a variety of events that can affect their ability to make debt payments. They also permit borrowers to buy only the amount of protection that they need, based on their financial situation and amount of outstanding debt.Consequently, DCCs—as well as debt suspension agreements (DSAs)—often are a more suitable form of debt protection for borrowers than credit insurance.
Credit insurance is commonly offered with retail store cards and traditional credit cards, with coverage typically costing a few dollars a month.
Availability and Regulation of Debt Forgiveness Products
DCCs are available forconsumer loans, including installment loans, auto loans, mortgages, home equity lines of credit (HELOCs), and leases. The borrower pays a fee to a creditor in receipt of the protection provided. Federal banking regulators, federal courts, and most states recognize DCCs as banking products because they do not have the attributes of insurance.
DCCs are available from federal- and state-chartered depository institutions, in addition to non-depository creditors. DCCs are subject to comprehensive regulation by federal and state banking regulators. DCCs may originate either with the underlying credit transaction, or after the closing or establishment of a loan or a line of credit.
The transfer of risk inherent in credit insurance requires regulation of the product as insurance. This regulation protects the bank in case of insolvency. However, the same safeguard is not present with a debt cancellation product.
With a DCC, thecreditor retains all of the risks of payment cancellation or suspension. Additionally, DCCsare not sold through insurance agents, brokers, or other intermediaries. They are a feature of the extension of credit, provided by a lender that the customer may cancel at any time. Banks and auto agencies offer debt cancellation agreements (DCAs), instead of insurance, in exchange for a fee and a deductible.
Gap insurance, which is often required for high-cost vehicles that depreciate quickly, is a form of debt cancellation agreement.
Example of Debt Cancellation Agreement
DCAs can differ based on state and jurisdiction. For example, the Texas Office of Consumer Credit Commissioner (OCCC) specifies contract requirements for DCAs provided by auto agencies to consumers. Among the more interesting requirements is the fact that the buyer maintains property insurance for the vehicle while it is under their ownership. Typically, DCAs are considered an alternative to insurance. However, the requirement for insurance is concerned with the depreciation in the value of the automobile.
If you have a complaint or concern about a debt cancellation product, the Consumer Financial Protection Bureau (CFPB) suggests contacting your state insurance department or commissioner.
If You’re Struggling to Repay Debt
When you’re having difficulty keeping up with auto loans, credit cards, or other types of debt, and debt cancellation is not an option, then it’s important to consider all the solutions available to you. Seeking debt relief, for example, may allow you to take advantage of things likedebt settlement or debt consolidationfor managing outstanding obligations.
If you’re considering using a debt relief company, it’s important to do your research first. The bestdebt relief companiesgenerally have reasonable costs and a strong reputation for excellent service. Taking time to compare the services offered and the fees you may pay can help you choose a reputable company with which to work.
If you're struggling with debt, then a credit counseling agency may also be worth considering. These companies can provide useful guidance on managing your debt and other financial topics, in addition to potentially negotiating a debt settlement with your creditors on your behalf.
When Is a Debt Cancellation Contract Offered?
A DCC is offered when your loan is being signed. If you are purchasing a vehicle, it may be offered at the same time as gap insurance. Banks and credit unions will also offer DCCs at the time of signing.
What Type of Circ*mstance Is Covered by a Debt Cancellation Contract?
Debt cancellation contracts promise to forgive your debt if you become disabled, unemployed, suffer another hardship, or pass away. Each DCC is different so read the fine print to learn exactly what is covered.
How Do You Pay for a Debt Cancellation Contract?
Every DCC is different, but typically, fees for the contract are either paid in a lump sum upon signing or they may be charged as a monthly fee. Discuss the payment method before signing the contract.
The Bottom Line
Debt cancellation contracts provide a measure of protection in the event that you cannot repay your debt due to hardship. However, they may not be the best way to protect your family. Disability insurance or life insurance may be more cost-effective options that would similarly protect you in the event you become disabled or pass away. Consider all your options before signing.
