Recently, we discussed “zombie debt,” which is debt that you no longer legally owe but the creditor is still attempting to enforce payment. Plenty of people think “charged off” debt means the same thing, but it isn’t. The two are distinct, and Las Vegas debtors should know the difference.
- Charged off debt is an accounting term. A bank charges off debt by declaring that it does not expect the debtor will repay the debt. “Expect” here does not mean “no longer obligated.” Just because a debt is charged off does not excuse the debtor from repaying it if it is still good debt.
- The benefit of charging off a debt is that it gives the bank a tax exemption. Since banks buy and sell money, a bad debt is just a business loss, and by declaring the loss, it reduces the bank’s income, which in turn reduces the taxes it ends up paying.
- Federal regulations govern when a bank is allowed to declare a debt charged off. For installment loans, the bank must wait 120 days after the first delinquent payment to charge it off, and for credit card debt, the charge off must occur after 180 days after delinquency.
- For credit card debt, once the debt is charged off, the credit account would no longer be usable.
- Charge-offs are among the worst things to happen to a debtor. They are placed on credit reports and will make accessing new credit extremely difficult. The charge-off will stay on the debtor’s credit report for seven years. Debtors who rally and pay down the debt will have the entries on their credit reports changed to “Charge-Off Paid” or “Charge-Off Settled.” These changes will not reduce the seven-year time period, but they are still better than the mere “Charged Off.”
- Banks will frequently bundle their charged off loans and sell them to collectors at a fraction of their value. Then the collectors will try to collect on them.
- When this happens, debtors may be able to claim that the statute of limitations has run out on the debt. The limitations period begins at the time of the first delinquent payment. If the owner of the debt waits too long to collect, it will be barred from doing so. In this case, it is zombie debt.
In situations when a creditor has a legitimate claim to a debt and calls one you to collect on it, you will need to pay it, settle it, or declare bankruptcy. If the situation is sufficiently dire, contacting a Las Vegas bankruptcy attorney is your best bet.
For more questions about bankruptcy in Las Vegas, please feel free to call an experienced Haines & Krieger Las Vegas bankruptcy attorney at 702-880-5554 for a free initial consultation.