Credit card debt is a common problem nationwide. The level of credit card debt consumers face recently reached record highs, according to the U.S. Government Accountability Office, and Americans now owe more than $1 trillion to credit card companies.
“Many Americans today are faced with weathering increased costs from higher-than-average inflation over the past two years, while living on an income that is just not keeping up with those inflation rates,” says Patrick Yono, founder of Sure Life Financial. “As a result, individuals and families are facing more personal debt than many have ever seen in their lifetime.”
So what can you do if youre struggling to find a way to pay off your debt? Do you have to deal with high-interest credit card debt for the foreseeable future or is there a way out?
Banks and other lenders don’t love writing off debts but sometimes it becomes the best option when faced with a delinquent borrower. Debt write-offs allow lenders to remove non-performing loans from their books and get a tax break. However the story doesn’t end there for the borrower. Let’s take a deep dive into how and why lenders write off debts.
What is a Debt Write-Off?
A debt write-off refers to a lender removing a delinquent account from their books because they’ve determined the debt is not collectible. The lender declares the remaining loan balance a loss, then takes a tax deduction for that amount.
Common types of debt that get written off include
- Credit card debt
- Personal loans
- Auto loans
- Medical debt
- Mortgages
Banks and lenders try to avoid write-offs since they represent lost revenue. But sometimes cutting their losses becomes the best option.
Why Do Lenders Write Off Debts?
There are a few key reasons a bank or lender will write off debt:
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The borrower is insolvent – They filed for bankruptcy or otherwise lacks the income and assets to pay.
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The debt is too old to be legally collectible – The statute of limitations has expired.
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The borrower cannot be located – The lender has lost contact with the borrower.
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The amount is too small to be worth pursuing – The legal fees outweigh what could be recovered.
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The lender gets a tax advantage – They can deduct the write-off as a loss.
Essentially, the lender decides pursuing the debt further is throwing good money after bad. The write-off allows them to cut their losses and clean up their books.
The Write-Off Process Step-By-Step
Here is how a typical debt write-off process goes:
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Loan becomes delinquent – The borrower stops making payments on the debt.
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Lender attempts to collect – For 6-12 months the lender will try to contact the borrower, report late payments to credit bureaus, send collection letters, and make collection calls.
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Debt is “charged-off” – After 180 days without payment in most cases, the lender will charge-off the debt, treating it as a loss on their books. However, they still retain legal right to collect.
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Collection efforts continue – The lender will keep trying to recover the debt directly or by assigning it to collections agencies.
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Debt is written off – At some point (often 2-3 years), the lender will “close the books” on the account and write it off for tax purposes.
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1099-C cancellation of debt form issued – If the amount written off was $600 or more, the borrower will receive a 1099-C from the IRS reporting the forgiven debt as taxable income.
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Debt statute of limitations expires – The window to legally collect on the debt closes (times vary by state and debt type).
While specifics vary by lender and account, this is the general life cycle of an unrecovered debt progressing to write-off.
What Happens When a Debt is Written Off?
Let’s clear up some common myths about what happens when your debt gets written off:
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You don’t get off the hook – You still legally owe the debt. The lender can continue collection efforts. The write-off just removes it from their books.
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Your credit takes a hit – The delinquent account will devastate your credit score and stay on your report for up to 7 years.
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You may owe taxes – If lenders write off $600 or more, the IRS may see it as taxable forgiven income. You’ll get a 1099-C form.
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You’re still on the line – Debt collectors can still come after you for the written off amount. Only the statute of limitations provides true closure.
The write-off helps the lender, not you. Don’t expect a windfall of forgiven debt. Be proactive about resolving old collections accounts.
Can You Negotiate Debt Write-Offs?
In some cases, consumers can negotiate a favorable debt write-off:
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Settle for less – Offer the lender 20-50% of the balance as payment in full. This saves them collection costs.
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Get permanent closure – If paying any settlement, get the lender to agree in writing that it settles the debt fully.
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Seek credit repair – Ask that they remove negative status updates previously reported to credit bureaus after payment.
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Avoid tax issues – If the forgiven amount is $600+, ask the lender not to issue a 1099-C.
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Keep records – Get any settlement offer and payment plan in writing and keep copies to verify the debt’s resolution.
If you can pay something, even a few cents on the dollar, lenders have incentive to write off the rest in exchange for quick closure.
Other Key Facts About Debt Write-Offs
Here are some final essential points to remember about lenders writing off bad debts:
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Write-offs don’t happen automatically. The lender has discretion.
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Each lender has their own policies on time frames and criteria for write-offs.
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Lenders often sell written off debt to collectors for a fraction of its value.
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Write-offs are generally reserved for truly delinquent, hard-to-collect accounts.
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Promises to “write off” debts made in scam debt relief ads are mostly false. Beware.
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Tax reporting of forgiven debt as income is complex. Consult a tax pro if you receive a 1099-C form.
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Statutes of limitation on collections provide the only true closure. Write-offs still leave you on the hook legally.
While debt write-offs make life easier for lenders, they shouldn’t be seen as a silver bullet for consumers struggling with collections. Consult reputable sources like credit counselors for help negotiating and resolving old debts in a constructive way.
The Bottom Line
When used responsibly, debt write-offs allow lenders to clean up their books and cut losses on non-performing loans. But borrowers shouldn’t expect waived debts. Write-offs remove your account from the lender’s ledger, but you’re still legally obligated and credit damaged until old collections fall off your reports or age out of statute limits.
With persistence and negotiation, some borrowers can reach settlements where lenders agree to formally write-off a portion of the debt. But promotions of easy debt write-off promises should be viewed very skeptically. As with most financial matters, educating yourself, facing challenges head-on, and exploring legitimate options leads to the best outcomes.
Can I get my credit card debt written off?
The simple answer to this question is yes, you can get your credit card debt written off — at least in certain cases. But as you may imagine, theres nothing simple about that process, which often includes negotiations with credit card companies and debt collection agencies. In some cases, it could even include a visit to your local courthouse.
That said, its not impossible. Heres how you can do it.
How to get your credit card debt written off
Although it may be possible for you to get your credit card debt written off on your own, youll likely find it difficult to do so. As such, its best to reach out to a debt relief service to assist you in the process. There are two ways debt relief services can help get rid of your credit card debt:
Debt settlement services may not be able to get 100% of your debt written off, but theyre often able to wipe out a substantial portion of it. Heres how the process works:
- Payments: You immediately stop paying your creditors when you sign up for a debt settlement program. Instead, you send your payments to the debt settlement company. The debt settlement company will store your payments in a special-purpose savings account until you have enough money to settle your debts.
- Settlement negotiations: The debt settlement company starts negotiations with your lenders as soon as your special purpose savings account has enough of a balance to pay the settlements they reach. Although lenders are under no obligation to accept a settlement offer, they often do.
- The write-off: The debt settlement company pays the lender the settled amount, clearing the debt. The lender then writes off the balance that wasnt paid for as part of the settlement offer. Keep in mind that the amount of money the lender writes off is considered income for tax purposes. So, youll need to report your settled debts to the IRS.
Debt settlement offers relief in many ways. Not only does it typically result in the reduction of your credit card balances, it often leads to more affordable payments. Moreover, youll likely pay your debts off far faster than you would if you were to continue making minimum payments.
On the other hand, debt settlement involves foregoing payments to your lenders for several months, if not years. When your debt is settled, it will be reported as such to the credit reporting agencies. So, debt settlement will likely have a detrimental impact on your credit score.
Bankruptcy is another way to get your credit card debt written off. Although this is an effective option, you should only use it as a last resort. After all, bankruptcy comes with a significantly negative impact to your credit score that will likely take several years to recover from.
If you want to get out of debt as quickly as possible, but dont want to deal with the significant credit implications associated with having your debt written off, consider debt consolidation. There are two common ways to consolidate debts:
- Debt consolidation loan: You could take out a loan to consolidate high interest credit card debt. If you do, be sure the new loans interest is lower than the interest you pay on your credit cards.
- Debt consolidation service: Debt consolidation services typically negotiate lower interest rates and fixed payment plans with your lenders on your behalf. You send a monthly payment to the consolidation service and they send individual payments to your lenders until your debt is paid in full.
If youre struggling with debt, “it is always a good idea to seek the advice of a financial professional,” says Yono. An expert “may even offer you alternate solutions that are more beneficial once they get to know you and your specific circumstances.” Get in touch with a debt relief expert today to learn more about your options.
Joshua Rodriguez is a personal finance and investing writer with a passion for his craft. When hes not working, he enjoys time with his wife, two kids and two dogs.
What does write off mean on a credit report?
FAQ
Will the bank write-off my debt?
Creditors can agree to a reduced payment over a limited period, with the rest of the balance written off in some circumstances. This is often done using legal procedures but might be agreed by an individual creditor on your request.
How do banks write-off bad debts?
Under the direct write-off method, bad debts are expensed. The company credits the accounts receivable account on the balance sheet and debits the bad debt expense account on the income statement. Under this form of accounting, there is no “Allowance for Doubtful Accounts” section on the balance sheet.
Do banks really write-off credit card debt?
Should the challenges and missed payments continue longer term, the credit card debt could ultimately be written off, which is when a creditor considers it uncollectible and no longer counts it as an asset — typically after 180 days of non-payment.
Do banks sell off bad debts?
If your loan is classified as Non-Performing, then all of your banking credit facilities can be sold to an Investment Fund – not just the ones that have …
What happens if a bank writes off your debt?
A bank writes off your debt when it concludes you’re never going to pay. This doesn’t affect your obligation to pay back the debt. The bank can still try to collect on your unpaid bank debts, or turn them over to a debt collector. Unless the bank cancels the debt, you’re still at risk for a court judgment or a blow to your business’s credit score.
Do banks have to write off bad debt?
Under GAAP, banks are usually required to keep reserves for bad loans. When a bad debt is written down, part of the debt is recovered and part is written off, usually as part of a settlement. Banks prefer to never have to write off bad debt since their loan portfolios are their primary assets and source of future revenue.
What happens if you write off a bank account?
The bank can still try to collect on your unpaid bank debts, or turn them over to a debt collector. Unless the bank cancels the debt, you’re still at risk for a court judgment or a blow to your business’s credit score. Writing off accounts doesn’t affect the existence of the debt at all.
Does writing off accounts affect debt?
Writing off accounts doesn’t affect the existence of the debt at all. It’s all about the bank’s accounting and financial statements. If the bank loans your company $100,000, it expects to get the money back. The bank can list the $100,000 as an asset on its balance sheet.
How do you write off bad debt?
This process is called writing off bad debt. Under the direct write-off method, bad debts are expensed. The company credits the accounts receivable account on the balance sheet and debits the bad debt expense account on the income statement. Under this form of accounting, there is no “Allowance for Doubtful Accounts” section on the balance sheet.
What happens if a creditor writes off a bad debt?
Bad debt is an amount of money that a creditor must write off if a borrower defaults on a loan. If a creditor has a bad debt on the books, it becomes uncollectible and is recorded as a charge-off. What happens when a bad debt is written off?