If you are contemplating bankruptcy and have been notified by a credit
card company that
your debt has been written off, it is far from a reason to celebrate. In fact, it may be more reason
than ever to proceed with the bankruptcy.
While at first glance it may appear that the debt has vanished –
the phrase ‘written off’ may seem to imply that the debt has
been forgiven – the reality is far different. Debt that has been
written off is actually active debt, and you are still ultimately responsible
for payment of the debt.
Writing off a debt, also known as charging off a debt, is simply an accounting action used to reflect the likelihood that the debtor will not pay the debt.
As long as a debt is considered good and collectible, accounting rules
allow a company to count such debt as an asset, which in turn adds value
to the company. This is based on the assumption that at some point the
debt will be fully repaid.
However, if the credit card account falls sufficiently behind in payments,
the IRS requires the credit card company to move the debt from the asset
side of the books to the liability side. This reflects the possibility
that the debt will not be repaid by the debtor and the company will not
receive any funds related to the debt. This ensures that the value of
the company is not falsely inflated by uncollectible debt.
At its heart, this means the debt has been moved, it has not been eliminated
or forgiven, and the debtor is still responsible for repayment of the debt.
Often, credit card companies will do one of three things after writing
off a debt. The company will either continue to try to collect the debt, or will sell
the debt to a collection company. Such debts are sold at a fraction of
the value, since the collection company represents a guaranteed payment,
and you will then be pursued by the collection company for the full amount
of the debt. The third possibility is that you will be sued by the credit
card company for immediate payment of the full amount due.
Either scenario is bad news for a debtor.
The good news, however, is that filing for bankruptcy can put an immediate
end to such collection activities.
Even debt that has been written off is still debt, and is treated as debt
in bankruptcy. This means that elements of bankruptcy law, such an immediate
stay, which freezes any and all collection activities while the bankruptcy
is worked out, also apply to any attempt to collect a written off debt.
The credit company or collection agency will also be required to be a
party to any bankruptcy procedure, and that debt will be consolidated
into the bankruptcy.
If you are considering bankruptcy and have been notified that a debt has
been written off, you should
contact us immediately and discuss your options.
Filing for bankruptcy is a serious decision, and one that should never
be made without consulting with an experienced legal team with considerable
experience with bankruptcy law.