You may have received a letter from one of the credit card companies warning you that they intend to write off or charge off your debt. What exactly does this mean, you wonder? PayingPaul.Com is here to clear the air on credit card & medical bill terminology related to past due accounts.
Write Off – Also known as charging off the balance, this usually happens after six months of non-payment on a credit card account. In other instances and with some creditors (American Express, for example), the account may take much longer to be written off, if ever. This term refers to the creditors’ practice of reporting the debt as a loss to the IRS on their corporate tax returns or profit and loss statements. This helps them save on what they owe the government each year in taxes.
What Does It Mean For You
A charge off can mean a few things for the consumer. In most cases, it indicates that the credit card company will be sending the account to a third party debt collection agency to pursue the remaining balance, if they haven’t done so already. In other words, although they reported the debt as a loss to the IRS, you still technically owe the debt and they do intend on getting at least a portion of it back.
There are some positives associated with this happening, however. First, usually when the creditor writes off the debt, they will stop charging such high interest, as well as adding late fees and over the limit charges on your balance. So in most cases you won’t see your balance swelling at the same rate as before.
Another major advantage is that in many cases, the bank will sell the debt to a debt buyer. Although these types of agencies are notorious in their collections practices, one of the major advantages is they will usually gladly accept low settlement offers on their balances.
One major downside of this happening is it will have consequences for your credit. When a debt is written or charged off, the creditor may report as much to the credit bureaus, who in turn will notate it on your credit report. Generally the credit effects of a charge off are considered to be severely negative, but not as bad as a bankruptcy filing.
The Tax Effects Of Written Off Debts
When your credit cards are written off, it does not necessarily mean that you owe taxes on the balance. You may, however, owe the IRS if you settled a debt for less than the balance and the balance exceeds $600. That being said, the IRS does exempt anyone who was insolvent at the time of the settlement from being taxable on the forgiven balance. Insolvency is defined by the IRS as having more liabilities (debts) than assets (what you own). If you were insolvent at the time your debt was cancelled, then you would need to fill out IRS Form 982 detailing this fact with your income tax return. For many people who are settling credit card debt, they are overextended to the point where they are in fact insolvent, but you may want to discuss this with a licensed tax professional.
If you would like to be referred to a debt company for a free consultation about how to deal with your delinquent accounts, simply fill out a form and let PayingPaul.Com do the rest!