I often hear clients tell me that they no longer owe xyz credit company a debt because the company “charged off” the debt.  However, this is simply not true.  Your lenders will generally “write off” a delinquent account as a bad debt after 180 days, or six months. Most lenders attempt to collect their debts for a period of 180 days, and then, after that issue a “charge off.”  This action is reported to the consumer reporting agencies and will appear as a “charge off” or “ collection” on your credit report.

A “charge off” means that your delinquent debt was sold or transferred to a third party. In other words, your debt is a contract to repay money, and those rights are transferrable and may be sold to a third party.  In all likelihood, after your debts are charged off, you will remain legally responsible for repaying the debt.  Some, if not most, of the large credit card companies use collection agencies to collect their debts.  These agencies perform one of two roles: they either collect the debt on behalf of the credit issuer, or purchase delinquent debts directly from the credit card company.

In either instance you have a right to request that the original creditor or new account owner provide documentation that verifies the debt.  You have a right to request a record of assignment and transfer if your debt was sold to a third party.  You also have the right to request an account statement that provides a breakdown of the principal and interest owed, as well as a statement of all credits made to your account. For more information see 15 USC 1692g for the Federal statues on validation of debts. 

One of the down sides of having a debt “charged off” is that the original creditor will typically issue a 1099 misc.   Since the IRS considers debt that is not repaid to be income, that means you could end up owing money to the IRS because of your charged off debt.  If this happens, then you should have your tax professional prepare IRS Form 982.

If you are considering paying debts that are now owned by a third party, you may want to consider that paying off those debts may not improve your FICO credit score. The most important factor that weighs upon your credit score is what the original creditor reports to the consumer reporting agency. This report is weighed upon much more heavily than what is reported by a debt collector or third party assignee of a debt.  In other words, paying off collections accounts does not improve your credit score.

Most important, if you are having a hard time paying your debts, then you should talk to a bankruptcy professional.  At Grantham Law, we offer a free consultation to discuss your debt situation and explore whether or not Bankruptcy is a good option for you.  Call us today 978-595-1449.