What Does it Mean to Have a Credit Card Company Discharge a Debt?

Credit card companies are very good at pointing out your legal responsibility to pay your debt. This is not necessarily a bad thing, because it prevents people from abusing the credit card companies. However, people who are in serious financial trouble sometimes can get their credit card debt discharged, meaning they no longer have to pay.

Discharge

When a credit card company truly discharges your debt, it acknowledges that it is no longer going to pursue collection and that you no longer owe. In issuing a discharge, a credit card company effectively terminates its legal right to payment. Discharge with credit card companies often occurs as part of bankruptcy cases.

Impact

A discharged credit card debt means you no longer have to worry about the creditor trying to collect money from you, which can result in greater peace of mind. Because you don't have to pay the balance of the debt, you have an opportunity to restructure your finances and get back on track with your money. However, depending on how you receive the discharge, it can cause a serious ding to your credit score, and you may have to pay income taxes on the amount of debt that was discharged.

Company Reimbursement

Credit card companies understand that not all credit cardholders will pay what they owe. For this reason, many credit card companies have insurance that protects them from discharge losses, as well as from losses from settlements and other forms of debt forgiveness. After issuing a discharge to you, the credit card company may file an insurance claim, depending on how much you owe. If the claim is valid, the credit card company's insurance company will pay the credit card company at least some of the discharged amount. Even if the credit card company does not have this type of insurance, it still can report your bad debt as a loss to the IRS.

Discharge vs. Charge-off

People often confuse credit card discharge with credit card charge-off. A charge-off means that the credit card company no longer has your debt in its active accounts. It means the company formally has acknowledged that it isn't likely to get payment from you. It also means the credit card company has sent the debt to collections or sold your debt. Charge-off does not absolve you of responsibility for the debt the way discharge does.