What Is Debt Written Off
When you fail to make your credit card and loan payments, after a few months the lender and credit card company will declare your debt as uncollectable. This is referred to as debt write-off or credit card charge-off. Such writing off of a debt will be reported as a loss, while the lender and credit card company will reduce its tax liability. Writing off of a debt will not eliminate your obligation to pay off the debt.
Unpaid credit card bills, delinquent bank and overdraft charges are some of the different ways a consumer can incur a bad debt to a bank. For you it can result in a liability and for bank it will be an expense.
More About Write-Offs
When a bank writes off a debt it is considered as bad debt which they include as an uncollectible loss on the tax return. Such write-off is also known as "charge-off". Writing-off of debt will reduce the earnings of the bank and thereby it will reduce its taxable income as they will get to deduct it as a loss on its financial statements as well as on tax returns. This procedure will also reduce the overall tax liability of the bank, which is the main reason why a bank writes-off such uncollectable loss. However, by the word uncollectable it does not mean that the debt shall never be collected.
After Write-Offs, Collections Starts
After a bank or lender writes off a bad debt, it does not mean that no attempt will be made to collect the debt. The bank and lender will still pursue you for the payment. Most banks and loan lenders turn to collection agency to collect such bad debt. Either the bank sells the debt to the collection agency or hires the agency on its behalf to collect the debt. The agency will then attempt to collect the debt from you.
Consequences Of Collection
The very first step that the collection agency will take is to seize the funds that you have in your bank account that was used to make payment of the debt. This process of collecting the debt is called the right of offset. The bank or the collection agency may also decide to sue you in the civil court depending on the amount of cash you owe. If the collection agency wins the lawsuit, then the court will issue a judgment against you for the debt that you haven’t paid. Such judgment will give the bank or collection agency the legal right to seize your asset so that they can collect the debt you owe. This may also involve a wage garnishment, which is the process of deducting money right from an employee's salary and it may continue until the entire debt has been paid off or other arrangements has been made to repay back the debt amount. Another collection process may include placing a lien on your property until the debt owed by you is paid off.
When you fail to repay back your debt and the bank writes it off, it will be reported to the credit bureaus. Such charged-off account will appear on your credit report card. It will also have information about the amount you owe and how late you are with your payments. Besides, when a collection agency attempts to collect the debt, they may mention about the collection account as well on your credit report. Such charged-off accounts and collection accounts will remain on your credit report for up to seven years.
Thus, it is strongly recommended that you pay off your debts on time. Avoiding payments will only make your debt problems worse.