Can Canceled Debt Be Removed From a Credit Report?

Canceled debt typically appears as a charge-off account on a consumer credit report. Charge-off accounts will negatively impact your credit rating for years. Canceled debt, or charge-offs, can be removed from a credit report in accordance with the laws outlined in the Fair Credit Reporting Act. Consumers should be aware of the laws that pertain to canceled debt and monitor their credit report for inaccuracies and items that fall outside the statute of limitations.

What Is Canceled Debt?

Canceled debt is the term used when a commercial lender forgives or cancels debt due to a consumer's inability to repay a loan. Canceled debt amounts often include accrued interest as well as the principal loan amount. If the amount of the canceled debt exceeds $600, creditors may issue a Form 1099-C to the consumer. Consumers must report the amount of the canceled debt as income for the tax year during which the debt was canceled.

Credit Report Impact

Before a lender cancels the debt, the fact that the payments on the account are delinquent negatively impacts your credit rating. Payment history determines 35 percent of your credit score; creditors typically report delinquent accounts for six months prior to charging off the debt. After the debt is canceled, the resulting entry can negatively impact your credit until the statute of limitations expires. In addition, canceled debt affects your debt-to-credit ratio, which accounts for 30 percent of your total score. Closed canceled debt accounts reduce the debt, but they also reduce the available credit.

Statute of Limitations

According to the FCRA, credit-reporting agencies must remove negative account listings from your credit report after seven years. Consumers can monitor their credit reports by receiving a free annual report from each of the three credit-reporting agencies. When the seven-year statute of limitations expires, the canceled debt account listing should be automatically removed. If the reporting agency neglects to delete the item, consumers can file a dispute based on the FCRA limitation statutes.

Inaccuracy Disputes

The only other ways that a canceled debt account can be removed from your credit report is if the information is inaccurate or if the lender agrees to delete the listing. Consumers must file a dispute with any and all of the three reporting agencies that incorrectly list the account information. Each agency -- TransUnion, Equifax and Experian -- offers online dispute forms. It is not likely that the lender will forgive the debt and agree to not report the account unless the debtor agrees to pay a larger portion of the debt, meaning a smaller amount of debt is forgiven.