Debt Forgiveness Agreement

SHORT ANSWER TO THE MAIN QUESTION

Debt forgiveness is a way of extinguishing an obligation. Under Czech law, the creditor informs the debtor that the debt is forgiven, while the law presumes the debtor’s consent subject to the statutory conditions.

The creditor may forgive the entire debt or only part of it. It is equally important to determine whether the forgiveness concerns only the principal or also interest, default interest and other related claims.

In a specific relationship, the parties therefore need to define precisely which debt is extinguished, to what extent, and at what point in time.

If debt forgiveness forms part of a broader compromise, it is also necessary to determine whether the arrangement is truly only debt forgiveness or whether the parties are actually settling a wider disputed relationship.

YOU MAY BE THINKING…

“Can I forgive only part of the debt?”

“Can I forgive the interest but keep the principal payable?”

“Does the debtor have to agree?”

“What if I forgive part of the debt in exchange for immediate payment of the remainder?”

“What happens to security securing the debt?”

“And can I change my mind after forgiving the debt?”

The last question illustrates why debt forgiveness should not be treated merely as an informal gesture.

If the debt is to be extinguished, this is no longer simply a promise by the creditor not to enforce it for the time being.

THE REAL PROBLEM IN PRACTICE: THEORY VS REALITY

In theory, the situation is simple.

The debtor owes a debt.

The creditor decides that they no longer want to claim all or part of it.

The debt is extinguished to the corresponding extent.

In practice, however, the first question is what exactly do we mean by “the debt”?

There may be:

• principal,
• contractual interest,
• default interest,
• contractual penalties,
• damages,
• recovery costs,
• several separate debts arising from the same commercial relationship.

So if the creditor writes:

“I forgive half of your debt,”

it must be clear what “half” actually refers to.

Another issue arises when forgiveness is linked to some form of performance by the debtor.

For example:

“If you pay 70% of the principal within 30 days, I will forgive the remaining 30%.”

This requires the arrangement to specify precisely when the forgiveness takes effect and what happens if the debtor fails to satisfy the condition.

BIGGEST RISKS AND COMMON MISTAKES

With debt forgiveness, I would pay particular attention to:

• unclear identification of the debt being forgiven,
• uncertainty as to whether the entire debt or only part of it is forgiven,
• unclear treatment of ancillary claims,
• confusing forgiveness of principal with forgiveness of interest,
• overlooking contractual penalties,
• failing to address related security,
• uncertainty about when the debt is extinguished,
• conditional forgiveness without clearly defined conditions,
• using wording such as “I will not enforce the debt” instead of clearly addressing whether the debt continues to exist,
• confusing debt forgiveness with settlement,
• confusing debt forgiveness with an extension of the payment deadline,
• overly broad release language affecting other claims unintentionally.

A typical mistake?

“If you send me CZK 100,000 by Friday, I’ll forgive the rest.”

The debtor sends CZK 100,000 on Monday.

Suddenly, several questions arise.

Was Friday a strict condition of the forgiveness?

Can the creditor claim the entire remaining amount?

Did any partial forgiveness take effect?

What about interest accrued in the meantime?

One simple sentence can create a surprisingly complicated dispute.

HOW TO APPROACH IT: REALITY, NOT THEORY

With debt forgiveness, I recommend starting by analysing the existing obligation precisely.

1. Identify the debt

What contract or other legal basis gave rise to it?

What is the current principal amount?

2. Separate the individual claims

Principal.

Interest.

Default interest.

Contractual penalties.

Any other claims.

Only then can you safely determine what should be extinguished.

3. Define the scope of forgiveness

The entire debt?

Part of the principal?

Only interest?

A contractual penalty?

A specific combination?

4. Define when the forgiveness takes effect

Should part of the debt be extinguished immediately?

Or only after a particular condition has been satisfied?

5. If the debtor must perform something, define it precisely

How much?

By when?

To which account?

Is timely payment a condition?

What happens if payment is late or incomplete?

6. Review the broader relationship

Is the intention to deal only with one particular debt?

Or are the parties trying to close a wider dispute?

In the latter case, a more comprehensive settlement agreement may be the more appropriate solution.

PRACTICAL EXAMPLES

👉 Pay the principal and I will forgive the interest

The debtor has been in default for several months.

The creditor does not want the dispute to continue and offers:

“If you pay the full principal by a specified date, I will forgive the default interest.”

The commercial logic is clear.

The creditor receives the principal quickly.

The debtor saves the ancillary amount.

But the agreement needs to say whether the interest is forgiven immediately upon signing or only after the principal has been paid properly and on time.

👉 I will forgive part of the debt to bring the relationship to a quick end

The receivable amounts to CZK 500,000.

The debtor offers immediate payment of CZK 400,000 and says that they are unable to pay more.

The creditor decides to accept CZK 400,000 and forgive the remaining CZK 100,000.

If there is no dispute about the existence of the original receivable, this may genuinely be a case of partial debt forgiveness.

But if the parties also disagree about whether the original CZK 500,000 was actually owed, it may be more accurate to resolve their relationship through a settlement agreement.

👉 “I forgive the debt” – but which one?

The same two businesses have three unpaid invoices, a contractual penalty and default interest outstanding between them.

The creditor writes in an email:

“I forgive the remaining debt.”

Several months later, each party has a different understanding of what this meant.

The problem is not that the law is unusually complicated.

The problem is that the subject matter of the forgiveness was never precisely defined.

WHY YOU SHOULD BE CAREFUL WITH “I’LL DO IT MYSELF”

A debt forgiveness agreement does not need to be ten pages long.

In many cases, it should actually be short.

But it must be precise.

A generic template does not know:

• how much the debtor actually owes,
• what gave rise to the debt,
• whether ancillary claims exist,
• whether the debt is secured,
• whether all or only part of the debt is being forgiven,
• whether forgiveness is conditional,
• whether other claims exist between the parties,
• whether the parties are actually trying to resolve a broader dispute.

Most importantly, it is necessary to distinguish:

“I forgive the debt.”

from:

“I will not enforce the debt for now.”

These are not merely two ways of expressing the same idea.

Legally, they can have substantially different consequences.

LAWYER’S RECOMMENDATION + CHECKLIST

With debt forgiveness, I recommend one simple test:

After reading the agreement, can I calculate exactly how much the debtor owed before it and how much the debtor will owe after it takes effect?

If not, the agreement is not precise enough.

Quick checklist

• The original debt is precisely identified.
• Its current amount is stated.
• Principal and ancillary claims are distinguished.
• It is precisely defined what is being forgiven.
• It is clear what remains payable.
• The effective time of the forgiveness is defined.
• Any conditions are clearly specified.
• Late or partial performance is addressed.
• Related security has been reviewed.
• It is clear whether only one debt or a broader relationship is being addressed.
• Debt forgiveness is not confused with an extension of the payment deadline.
• Debt forgiveness is not unintentionally used where a settlement of the wider dispute is actually required.

FAQ

What is debt forgiveness under Czech law?

Debt forgiveness is a way of extinguishing an obligation under which the creditor expresses the intention to release the debtor from the debt.

Under Czech law, the debtor’s consent is presumed subject to the statutory conditions unless the debtor objects without undue delay, either expressly or by performing the debt.

Can only part of a debt be forgiven?

Yes.

Debt forgiveness may concern the entire debt or only part of it. The amount or scope of the forgiveness should therefore be defined precisely.

Can the creditor forgive only interest?

Yes.

For example, the creditor may preserve the debtor’s obligation to pay the principal while forgiving default interest or another clearly defined ancillary claim.

Does the creditor need the debtor’s consent?

Czech law operates with a presumption of the debtor’s consent. If the debtor does not agree with the forgiveness, the debtor must express that disagreement in the manner contemplated by law.

Is debt forgiveness the same as a settlement agreement?

No.

With debt forgiveness, the creditor allows all or part of an existing debt to be extinguished.

A settlement agreement is used to resolve disputed or uncertain rights by replacing them with a new agreed arrangement.

Depending on the circumstances, one mechanism may therefore be more appropriate than the other.

Can debt forgiveness be conditional on payment of part of the debt?

Yes, but such an arrangement needs to be drafted precisely.

In particular, it should be clear whether the remaining part of the debt is extinguished immediately or only after the debtor has paid the agreed amount properly and on time.