Debt “Write Off” and “Charge Off” Does Not Mean What You Think it Means
Have you ever had a debt “charged off” or “written off” on your credit report and assumed that you no longer owe the creditor anything? Well, you would be wrong. But don’t feel bad. These are terms of art used by accountants so their true meaning can not be understood by looking at the plain definition of the words.
If you are in default on a debt for over six months, then creditors will typically charge off what you owe. This doesn’t mean your balance is now zero. It simply means that the creditor is treating it as a bad debt. They basically do this for two reasons. First, they can’t keep old debt on their books forever as a potential asset to the company. That would be misleading to their investors. Secondly, by treating it as a bad debt they get to use it as a tax deduction under IRS Rule 166. But who cares about the creditors?
As a debtor, a debt charge off can be treated in several ways. On the one hand, the debt can continue to be owned by the creditor but might be “rented out” to debt collection agencies for them to try and collect. Or, the debt could be sold to a collection agency at a discount price so that they can both own it as well as try to collect.
As you can see, a charge off doesn’t tell you the whole story about what’s going on with your debt. This is because a charge off is really just a reclassification used by accountants to benefit the creditor in regard to investors and the IRS.
Write offs are slightly different and probably deserve their own post. But you should know that filing bankruptcy, either a Chapter 7 or Chapter 13, are effective ways to eliminate debt and achieve the results you thought you were getting with a charge off. But beware. If your debt gets written off, you may receive a 1099-C from the creditor which could result in you owing money to the IRS. And IRS debt can be difficult, if not impossible, to erase through bankruptcy.
So What Really is a Debt “Write-Off”?
There seems to a lot of confusion about charge offs and write offs. The terms seem to used interchangeably in some circles. Part of the reason for this has to do with the fact that they are basically terms of art used by accounts to classify bad debts. Does this mean much to a debtor who owes money to a credit card company? Not so much.
As discussed previously, seeing a charge off or write off on your credit report may lead you to believe that the debt no longer exists or will not be collected. But this is not the case. Both involve the reclassification of debts from accounts receivable to a potential loss. But creditors may still attempt to collect or sell the debt to agencies for them to collect. However, write offs typically involve a reduction in value of the account or asset.
For example, if you own your own business, then you may be allowed to write off your business expenses against what you earned for the year. If you have a business inventory of products for sale, then you may be allowed to write off losses for damaged goods, fire, theft, etc.
As I mentioned at the outset, these are primarily accounting terms that may not have importance to a consumer or debtor. The fact that what you owe has been charged off or written off does not guarantee that any debt has gone away for good. However, a good sign sign that you have had a write off that reduced or eliminated what you owe depends on whether you have received a 1099-C from the creditor. Depending on how much was written off, creditors are required to report large write offs to the IRS which triggers the requirement to file a 1099-C. Unfortunately, a 1099-C may also trigger a tax liability for the debtor.
To sum up, a charge off and write off is basically an accounting procedure to reclassify what you owe. But a write off may include a reduction or elimination of the debt. So if you do receive a write off, it is important to know if it involves a reduction or elimination, and whether a 1099-C has been issued.