When a consumer fails to repay a debt, the debtor may write off the debt. This is often also referred to as charging it off. Understanding what this refers to and what it means to you can help you decide what, if any, action to take.
Definition
Writing off or charging off a debt means reporting the debt as a loss on corporate tax returns and profit and loss statements. By doing this, creditors can minimize their tax liability to the Internal Revenue Service.
Timeframe
Debts are often written off six months after failure to repay them occurs. You may receive a notice from your creditor that a debt is about to be written off, but many times this happens without any notice to you. You may find out only when you see the charge-off reported as such on your credit reports. A charge-off often signifies the start of debt collection calls, as this is when credit-card companies and other debtors often sell off the debt to third-party debt collectors.
Significance
Although the credit-card company has reported your unpaid debt as a loss to Uncle Sam, you are still technically on the hook for the debt. A charge-off will also hurt your credit score, hindering your chances of getting new credit. And the debt can appear on your credit report for up to seven years. The silver lining is that when a debt is written off, creditors stop charging interest on it and adding late fees to the balance.
Taking Action
Once a debt has been written off, the collection agency can hound you to repay it for as long as the statute of limitation for the type of debt is in your state. You can, however, work out a repayment plan with the collection agency, or offer to pay a lump sum to settle the debt and have it removed from your report or have the agency report that the debt has been paid in full.
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