How To Write Off Credit Card Debt Legally
Credit cards can be a source of rewards, but they can also lead to large amounts of debt. When you trying to reduce credit card debt, it can force you to look for options including a legal way to write off the debt.
However, getting your debt written off isn’t really in your hands to begin with, and is usually up to the credit provider.
If you are looking for ways to get your credit card debt written off, you should be aware of the following information.
What Does it Mean to Write Off Credit Card Debt?
Unfortunately, you can’t just decide you want to write off your debt, so you don’t have to pay it.
When a credit card company writes off debt, it usually means they have accepted the balance you owe as a loss.
While this might seem like good news to you, it could lead to many other issues you have to deal with before you are able to be free of the debt.
The Basics of Writing Off Debt
Although it can vary according to the state you live in, writing off debt basically involves the debtor failing to make payments and the credit card company declaring the debt uncollectable.
If you have missed at least 6 months of payments, the company will determine that there is little or no chance of collecting on the debt. This process can also be referred to as a charge-off or charging off debt.
This allows the credit card company to report the account as a loss in order to reduce its tax liability by declaring the account a worthless asset and deducting it as a loss.
The amount of time you have before your account is written off can vary, depending on the card company, your assets, and your payment history.
Selling Debt to Collection Agencies
Your credit card company will typically sell those debts to debt collection agencies who will continue to collect any part of the balance you owe.
Credit card companies usually sell these accounts for amounts much lower than the balances owed, in an effort to recoup some of the debt. This allows the collection agencies to then pursue collections.
If they are able to get the debt paid off, even for a lesser amount than what is owed, the collection agency will typically make money. This is because they can usually collect much more than they paid for the account.
Can You Actively Have Your Credit Card Debt Written Off?
Besides not making your payments for at least six months, there really isn’t any way you can actively have your credit card debt written off.
If your goal is to have the debt completely eliminated without paying what you owe, you might have to consider either debt consolidation or bankruptcy.
In debt consolidation, all the debts you owe, including credit card debt, is combined into one monthly payment, usually with a loan.
You will then be responsible for making one loan payment each month, rather than continue paying on each account.
This doesn’t write off your credit card debt, but it does give you an option for getting rid of it.
The other option if you can’t make your payments, is to file bankruptcy, which will essentially get rid of your credit card debt without paying off the balance.
There are certain requirements you will need to meet in order to qualify for bankruptcy, and you could still end up being responsible for some of your credit card debt.
The Debt Isn’t Erased
Although the credit card company has written off the debt and sold the account to someone else, it doesn’t mean the debt is erased.
Because you still owe the balance on the credit card, debt collectors can still call or sue you and collection agencies will continue to pursue collection.
Impact on Credit Score
When debt is written off, it can affect your credit score quite a bit.
Not only will the credit card company report it as written or charged off, which is reflected on your credit reports, but you also then have a collection account on your reports if the debt is sold.
Because of this, a charged off account can have a negative impact on your credit score and can affect it for at least seven years.
According to FICO, late payments account for 35% of your credit score. If you have a charged off account, you’ve likely already felt the impact on your credit score with the late payments.
Late payments can drop your score 60 to 80 points.
If you have an excellent credit score, a late payment can affect it more and cause it to drop 90 to 110 points.
It can take a couple of years after the account is charged off for your score to begin to increase again.
As if falling behind in your credit card payments and dealing with the decrease in your score after an account is charged off weren’t enough to deal with, there’s more. You could end up owing the IRS.
Because the credit card company determined your debt to be uncollectable when it wrote it off, it is reported to the IRS as lost income (this is the same with debt reduction.)
The IRS will then turn to you to collect the tax on this money. And, the amount you owe is now considered gained income.
If your credit card company writes off $600 or more of a debt’s principal, they will typically send you a form 1099-C so that you will report the amount as income on your taxes.
Even if you haven’t received a 1099-C, you could still owe taxes on the written-off account, and if you haven’t paid taxes, you risk getting audited if the creditor provided the information to the IRS.
There are instances where you might not have to report your charged off debt as income. Some of these situations include the following:
- Nonbusiness debt canceled before 2007 because of Hurricane Katrina
- Canceled student loan because you worked in a profession as promised when you took the loan
- Cancellation or write-off is intended as a gift
- Discharged debt in bankruptcy
- Insolvency before the creditor agreed to write it off
- Canceled debt would have been deductible if paid
Tips for Handling Charged Off Credit Card Debt
One of the most important things you can do is attempt to set up payment arrangements with the credit card company even before the debt is charged off.
This can save you from having to deal with collection agencies or other debt collectors later. Plus, you might be able to turn your account around and get back on track.
Other tips for handling your credit card debt include the following:
- Negotiate lower interest rates
- Negotiate lower repayments
- Do not ignore the credit card company or the collection agency
- If you are working with a collection agency, you have a good chance of negotiating a much lower balance
It isn’t always easy to manage credit card debt and other responsibilities, especially if you have been faced with hardship such as losing your job or a medical emergency.
Charging off debt yourself is not usually an option. And, if your credit card company writes off your debt, you still have to deal with debt collectors and collection agencies.
Even worse, you could end up owing the IRS. This is without even factoring in the damage that has been done to your credit score.
However, it isn’t an impossible situation and many consumers have been able to negotiate and work with credit card companies and collection agencies to get back on track.