Written by: Kelly M. Resnick, Resnick Law Offices, Serving the Bay Area
This question is a common one during this time of year-tax season-because sometimes a creditor will issue a 1099-C, which reflects “cancelled debt”, and the creditor says that the debt is “charged off.” Usually, when a debtor hears that their debt has been charged off, he/she assumes that they no longer have to pay this debt and the debt has been eliminated. Wrong!
A debt is owed until paid it is paid, or discharged in a bankruptcy. The term “charge off” makes it sound like the debt went away, and it did–just not from you. Charge off is an accounting term used by creditors when they remove the debt from their balance sheet and take it as a loss on the creditor’s taxes. Typically, a debt is charged off after approximately 180 days of nonpayment. If no payment has been made in that amount of time, the accounting rule is that the debt can’t be carried on the books as a current asset since it is unlikely it will be paid in the future. But the accounting move by the creditor to charge off the balance due in no way affects your responsibility to pay what is owed, and the creditor will continue to report your non-payment of this debt on your credit!
Even though a debt is charged off, the original creditor may still pursue you for payment or the creditor may sell your debt to a collection agency and thus, the collection agency may still pursue you for payment.
Another aspect of this situation you should be aware of is that when a creditor charges off a debt, that debt is now counted as income on your personal taxes. Depending on the amount of debt, it may push you into a higher income tax bracket and/or result in owing additional taxes to the IRS. I am not a tax professional, so you should speak to a tax professional about this scenario. However, filing a bankruptcy will eliminate your personal obligation to repay the debt and may eliminate the necessity for you to pay taxes on that cancelled debt.
Bottom line: do not ignore any of your debts, especially if any are charged off, and speak to a reputable bankruptcy attorney about your options.
If you or anyone you know have received a 1099-C this year and are unsure what to do, call us at 510-860-3688 for a free consultation today!
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