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What Does Charged Off Mean?

Written by Steve Rhode

Question:

Dear Steve,

I have 6 negative CC balances on my credit report that are ” Charged off” what does that mean?

What does the charge off mean?

Bruce

Answer:

Dear Bruce,

I love your question. It’s an issue that so many people don’t understand.

A charge-off is an accounting function and this is almost always regulated by the rules of the Office of the Comptroller of the Currency.

“For closed-end credit, loans should be charged off when a loss is identified but generally not later than 120 days past due. Such open-end loans as credit card accounts must be charged off at 180 days past due. See OCC Bulletin 2000-20, “Uniform Retail Credit Classification and Account Management Policy: Policy Implementation” (June 20, 2000).”

The lender is required to reflect the bad debts as a charge off to document it is not a performing asset.

The majority of debt that banks charge off and sell to debt buyers is credit card debt, but banks also sell to debt buyers other delinquent debts, such as auto, home-equity, mortgage, and student loans.

Now here is a real kick in the pants, “Although banks charge off severely delinquent accounts, the underlying debt obligations may remain legally valid and consumers can remain obligated to repay the debts. Banks may pursue collection of delinquent accounts by (1) handling the collections internally, (2) using third parties as agents in collecting the debt, or (3) selling the debt to debt buyers for a fee. This guidance focuses on the third category of bank practice for fully charged-off debt.” – Source

Yes, you did read that correctly. A debt may be charged-off, you may owe tax on the forgiven debt, and you may still owe the charged-off debt. It’s complicated.

When a debt is charged-off you should get a 1099-C form reflecting the debt may have been forgiven. Just because you do not get that form, does not mean the IRS did not receive it. Unless you are insolvent you may owe tax on the forgiven amount.

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This is one of the reasons consumer bankruptcy can make sense. It will eliminate the debt tax-free and avoid a debt coming back as legally collectible. It essentially closes the door on the debt for good.

I guess a good way to clarify this for you is a charge-off is something that happens in the life of a debt but is not a final disposition of a debt. A charged-off debt is not gone for good just because it has charged-off.

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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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