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.