Does Debt Written Off Have to Be Repaid?

When a borrower does not repay a debt for a long period of time, many creditors will write off the balance to gain tax credits for the lost money. Though the term implies that the creditor has declared the debt void, charged-off balances and unpaid balances remain valid and can haunt a borrower's credit report for years.

Requirements

According to Steve Bucci, a debt adviser for the financial website Bank Rate, debtors remain under obligation to repay borrowed funds even if the creditor writes off the outstanding balance. Bucci goes on to explain that the Internal Revenue Service grants lenders a tax deduction for uncollectable loans, but the lender must officially write off the debt to receive the deduction. For this reason, writing off a debt serves little more purpose than to satisfy tax accounting requirements, and the process does not relieve the debtor of the responsibility to repay the outstanding balance.

Collection Activity

Bucci also points out that creditors may continue collection activity even after writing off a debt. If a borrower fails to repay, the creditor may continue to call and send letters as long as it complies with the federal Fair Debt Collection Practices Act. In addition, a creditor may sue to recover a charged-off debt, though many lenders do not pursue expensive legal action in an attempt to recover relatively small balances.

Credit Impact

Creditors who cannot collect a debt typically report the outstanding balance to major credit reporting bureaus. This report remains on the debtor's report for up to seven years, and can cause serious credit problems if it remains unpaid. In a 2008 advice column, the financial website Bills.com observed that lenders frequently deny credit applicants with charged-off debts in their credit files. Unresolved accounts also affect the debtor's debt-to-income ratio, an important criteria for many mortgage and auto loans. Debtors with large charged-off balances may not qualify for real estate or automotive financing.

Solutions

Though debtors remain obligated to repay written-off debts, there are some options for resolving outstanding balances. The financial website The Motley Fool notes that borrowers can typically negotiate repayment of charged-off debts with their creditors, as many financial institutions would rather recover portions of debts than allow them to go entirely unpaid. Bills.com elaborated that many creditors will forgive as much as half of a charged-off debt depending on the outstanding balance and the debtor's negotiation skills. Debtors who cannot negotiate with the lender may choose to repay the debt in full to resolve the issue, though some allow the balance to remain unpaid until it becomes too old to appear on a credit report. The Motley Fool notes that, in extreme circumstances, borrowers who cannot repay very large charged-off debt may consider filing for bankruptcy protection.