So What Really is a Debt “Write-Off”?

There seems to a lot of confusion about charge offs and write offs. The terms seem to used interchangeably in some circles. Part of the reason for this has to do with the fact that they are basically terms of art used by accounts to classify bad debts. Does this mean much to a debtor who owes money to a credit card company? Not so much.

As discussed in a previous post, seeing a charge off or write off on your credit report may lead you to believe that the debt no longer exists or will not be collected.  But this is not the case. Both involve the reclassification of debts from accounts receivable to a potential loss. But creditors may still attempt to collect or sell the debt to agencies for them to collect. However, write offs typically involve a reduction in value of the account or asset.

For example, if you own your own business, then you may be allowed to write off your business expenses against what you earned for the year. If you have a business inventory of products for sale, then you may be allowed to write off losses for damaged goods, fire, theft, etc….

As I mentioned at the outset, these are primarily accounting terms that may not have importance to a consumer or debtor. The fact that what you owe has been charged off or written off does not guarantee that any debt has gone away for good. However, a good sign sign that you have had a write off that reduced or eliminated what you owe depends on whether you have received a 1099-C from the creditor. Depending on how much was written off, creditors are required to report large write offs to the IRS which triggers the requirement to file a 1099-C. Unfortunately, a 1099-C may also trigger a tax liability for the debtor.

To sum up, a charge off and write off is basically an accounting procedure to reclassify what you owe. But a write off may include a reduction or elimination of the value of the debt. So if  you do receive a write off, it is important to know if it involves a reduction or elimination, and whether a 1099-C has been issued.

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Debt “Write Off” and “Charge Off” Does Not Mean What You Think it Means

Have you ever had a debt “charged off” or “written off” on your credit report and assumed that you no longer owe the creditor anything? Well, you would be wrong.  But don’t feel bad. These are terms of art used by accountants so their true meaning can not be understood by looking at the plain definition of the words.

If you are in default on a debt for over six months, then creditors will typically charge off what you owe. This doesn’t mean your balance is now zero. It simply means that the creditor is treating it as a bad debt. They basically do this for two reasons. First, they can’t keep old debt on their books forever as a potential asset to the company. That would be misleading to their investors. Secondly, by treating it as a bad debt they get to use it as a tax deduction under IRS Rule 166. But who cares about the creditors?

As a debtor, a debt charge off can be treated in several ways. On the one hand, the debt can continue to be owned by the creditor but might be “rented out” to debt collection agencies for them to try and collect. Or, the debt could be sold to a collection agency at a discount price so that they can both own it as well as try to collect.

As you can see, a charge off doesn’t tell you the whole story about what’s going on with your debt. This is because a charge off is really just a reclassification used by accountants to benefit the creditor in regard to investors and the IRS.

Write offs are slightly different and probably deserve their own post. But you should know that filing bankruptcy, either a Chapter 7 or Chapter 13, are effective ways to eliminate debt and achieve the results you thought you were getting with a charge off. But beware. If your debt gets written off, you may receive a 1099-C from the creditor which could result in you owing money to the IRS. And IRS debt can be difficult, if not impossible, to erase through bankruptcy.

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Using Credit Cards Before Filing Bankruptcy May Be Treated as Fraud

If you are thinkingFraud-2 about filing for bankruptcy, then you should stop using your available credit cards.  Certain purchases and cash advances taken right before filing can be treated as fraudulent, and ruled non-dischargeable if a creditor files an objection.

As a general rule, if you purchase a total of $650.00 in luxury goods (i.e. non-essential purchases related to living expenses) within 90 days of filing bankruptcy, or $925.00 in cash advances within 70 days, then there is the possibility that your purchases will be treated as fraud.

It should be noted that a creditor can file an objection to discharge of a debt for different reasons.  It does not happen often, but if it does they will be required to prove in court that you acted with the intent to defraud them.  This can be difficult to prove because it puts the burden of proof on the creditor.  However, if a debtor makes any of the purchases or cash advances listed above, then the debtor will be assumed to have acted fraudulently, and the debtor will have the burden to prove it was not fraud.  This can be difficult to prove, as well.

Bottom line: just stop using credit cards or taking cash advances prior to filing bankruptcy, and you can avoid the entire issue.

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Bankruptcies in the News: Actor/Singer – David Cassidy

Partridge_Family_David_Cassidy_One_Day_At_A_Time_1973-500x373

David Cassidy – Partridge Family, 1970-1974

David Cassidy, probably best known from the 1970’s show The Partridge Family, filed for Chapter 11 bankruptcy this year.  According to court documents, he has around $4,000,000.00 in assets, and $2,000,000.00 in debts – one hundred thousand of which are past due legal fees to his Florida lawyer.

The choice to file under Chapter 11 was due in part to the amount of assets he still owns, and the value of the unsecured debts he owes. Most of the time, Chapter 11 is reserved for business bankruptcies.  See: Radio Shack, and the weapon manufacturer Colt.  For most individuals with high income or assets they wish to keep, the option is Chapter 13.  However, a Chapter 13 restructuring is generally not available if an individual has over a million in secured debt, and close to four hundred thousand in unsecured debt.  In these situations, Chapter 11 is the only other choice.  Some of the assets Cassidy claims include homes in New York, Florida, and the Bahamas.

In the final analysis, his case illustrates the fact that not everyone who files for, or needs, bankruptcy protection is financially destitute.  Getting a fresh start is something that is available to people in a wide variety of situations.

My “Bankruptcies in the News” blog is aimed at providing articles of interest regarding famous companies, or individuals, who have sought bankruptcy protection.  It should be noted that although bankruptcy filings are public record, the docket itself is not readily available through simple internet searches. It is maintained behind a “pay-wall” requiring a registered account, and payment for searches. Therefore, if you file for bankruptcy, it is unlikely anyone will be aware of this fact ~ unless you are a famous public figure.
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Why You Should File Late Taxes Before Filing Bankruptcy

The Money Changers, by Maarten van Reymerswale, 17th c.

“The Money Changers” by Maarten van Reymerswale, 17th c.

There is nothing like the inevitability of taxes.  Even more so if you are going to file bankruptcy.  If you haven’t filed a return for a prior year, you should do so now to avoid the negative consequences of a denial of discharge or a a dismissal of your bankruptcy. But there are a few exceptions.

When drafting a bankruptcy petition, the value of having copies of prior year returns is that you can easily record past income.  After you bankruptcy is filed, regardless of whether it is a Chapter 7 or a Chapter 13, the trustee assigned to your case will want copies of at least the last two or three year’s returns.  The deadline to provide these documents is usually 7 days prior to the date of your 341 meeting of creditors.  If you do not submit these documents, then you may be denied a discharge in Chapter 7, or have your Chapter 13 denied confirmation.  Obviously, you can not get rid of a dischargeable tax debt if you did not even file a tax return either.

One of the advantages to filing a late return on your own is the fact that you will avoid having the IRS file a substitute return for you.  If a substitute return is filed, you may not get the advantage of certain exemptions or deductions that you would otherwise be qualified to claim. And you will also avoid the problem of having additional interest and penalties compounded.

In certain situations, you may not be required to file a late return for prior unreported years.  This is usually the case for those who do not have qualifying income, or do not meet the reporting requirements.  This commonly applies for those who get small retirement pensions, or receive social security income.  In these situations, it is enough to execute an affidavit stating the reason for non-filing which can be given to the trustee on your bankruptcy.

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