A debt that is written off is one that businesses will take on their tax return as a loss, meaning that the IRS will subtract the amount of that debt from any income that the business received during that tax year. It benefits the business to either write off an unpaid debt during the current tax year or sell the debt for pennies on the dollar to a collection agency, thus making some profit, but still retaining the ability to take a tax deduction on the remaining debt.
When Creditors Write Off Debt
For any debt that is 30 days past due, a creditor will typically turn the debt over to the collections department to attempt to make the debtor become current with phone calls and letters. After 60 -90 days, and no payments, the account is then put into a "red flag" status. The likelihood of being able to collect the debt at this point decreases with each passing day. Most creditors will wait until a debt is over 120 days past due before they write the debt off as a loss. Some creditors (depending on the type of loan) will write off a debt once it is over 180 days old. The amount of time taken to write off a debt by an individual creditor will vary, but the "industry standard" is between the 120 and 180 day mark.
What Happens After Write Off
When a creditor writes off a debt, it does not invalidate the debt or absolve the debtor from re-payment. The write-off is only beneficial to the creditor for tax purposes and cannot be taken as a deduction by the debtor. Once the debt is written off, the creditor can either refer the balance to an in-house collections department to attempt to collect on it, or sell it to an outside collection agency (typically for less than the balance) and let them attempt to recover the delinquent debt in an attempt to turn a profit for their own company.
Many times, collection agencies will purchase debts written off by original creditors for pennies on the dollar. In these cases, the agency will approach consumers with an offer to settle the debt for less than the original balance. It will be pitched to the consumer as if the agency is doing them a favor by offering to settle for less, when in fact, they have purchased the debt for less than the amount they are willing to settle for. Many agencies will use fraud and illegal tactics to attempt to collect on a debt they have purchased. When communicating with any collection agency it is good advice to be cautious and not to trust what they tell you in most cases.
Know Your Rights
Due to unethical practices by collection agencies, it is important to know the rights for consumers in each state. Every state has a posted statute of limitations for a debt to be collected. If the debt is not collected once the statute of limitations has expired, the consumer is no longer legally bound to pay that debt. The statute of limitations can range from 2 to 5 years, depending on the state that the debtor lives in.
Regardless of the statue, laws of credit reporting allow delinquent, unpaid debts to stay on consumer reports for as long as seven years. Having derogatory information on credit reports can make it difficult to obtain preferred loan terms or qualify for better rates of interest.
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