Sometimes creditors will tell you they have “charged off” your debt. That sounds like a good thing, like maybe you don’t owe the money anymore. Right?
No, wrong. A charge-off is just an internal bookkeeping entry for the creditor. It means that your debt has been re-categorized from a performing debt to a non-performing debt. Performing debts owed to a creditor are considered assets by the creditor, as part of accounts receivable. When a debt is charged off, it means that the debt is removed from accounts receivable and is no longer an asset to the creditor. It does not mean that you no longer owe the debt, nor does it mean the creditor can’t try to collect the debt.
Clients sometimes wonder if they can include charged off debts in their bankruptcies. The answer to this is yes, you can. You can also include judgments in your bankruptcy. It’s never too late or too far down the road to include a debt in a bankruptcy.
Once in a very great while a creditor will forgive a debt. Debt forgiveness is a completely different animal from a charge-0ff. If a debt is forgiven, it means the creditor releases you from liability for that debt. Forgiven debts can and should be listed in your bankruptcy, just to be safe. But they can’t be collected once forgiven. However, if a debt is forgiven you might owe taxes on the amount of the debt that was forgiven. That’s because the Internal Revenue Code treats forgiven debts as income. So if a creditor forgives a $25,000 debt, the IRS considers that as $25,000 in additional income that you received in the year of forgiveness. The IRS will learn of that forgiven debt because the creditor who forgave the debt will file Form 1099-C, which will list your name, identifying information, such as social security number, and the amount forgiven.
Also once in a very great while you might run into an IRS agent who thinks that, because you filed bankruptcy and no longer owe the debts listed in your bankruptcy, that’s like the debts were forgiven and you owe taxes on all the debts that were discharged in your bankruptcy. That IRS agent is completely wrong. In its definition of “income” the Internal Revenue Code specifically provides that debts discharged in bankruptcy are not to be counted as income to the taxpayer.
If you have questions about charge off debts, forgiven debts, judgments, or bankruptcy, please contact us.