Charge off is a confusing term. It sounds like the debt is gone and you don’t owe it anymore.
However, it’s not, and you do.
So, what is a charged off debt?
A charged off debt means a debt that the creditor sold the debt to a collection agency and took a tax deduction for it.
- Debts exist until they are paid, discharged in bankruptcy, or until the statute of limitations to collect is over
What about credit reports?
Credit reports make the confusion worse because a credit report will often list a debt as:
- Charged off
- $0 balance
If you saw that, then you might think the debt is gone, but keep looking at the credit report.
You should see the same debt listed again as “in collections,” probably with a different company.
This is because the original creditor sold the debt to a debt collector, so now the borrower owes the money to the debt collector and not to the original company anymore.
- Charge off does not mean that the statute of limitations has passed on the debt
DO I STILL OWE A CHARGED OFF DEBT?
Yes, but you probably owe it to a different company than the debt started with.
Banks and other creditors often have to follow a set of rules called Generally Accepted Accounting Practices (GAAP).
These rules require banks to sell debt that has been in default for 2 months. (Default means that the creditor is not receiving payments on the loan).
So if a loan goes unpaid for a few months, the original creditor charges off the loan and sells it to a collection agency.
The collection agency then has all of the rights to collect the loan, including taking the debtor to court for a judgment.
You probably owe a charged off loan even if you have received a 1099-C for discharge of indebtedness. Banks often send a 1099-C for discharged debt when they sell it to a collector.
It can be a surprise to pay taxes on a debt, but then get sued for it later.
If you file bankruptcy on the debt, however, then you don’t owe taxes on any debt forgiveness and no creditors or debt collectors can sue you anymore.
If you’ve got charged off debts on your credit report, or you’re now dealing with a different company to that which you borrowed the money from, then why not see if filing for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy is right for you?