Can You Legally Write Off Debt? What You Need to Know
Debt can feel heavy, but some strategies can help lighten the load. One option is to write off debt. You might have heard of this concept, but how does it work? That’s what we are here for.
Join us as we define this complex process. We’ll discuss the types of debt that can be written off, what to expect with each type, and much more.
Key Takeaways:
- Writing off the debt means lowering your debt and lightening your financial load.
- Several types of debt, such as credit card debt, student debt, and tax debt, can be written off.
- The main difference between write-off and bankruptcy is that bankruptcy is a legal process conducted in court, while write-off debt is negotiated directly with the lender.
What Does It Mean to Write Off Debt?
In short, writing off debt means a lender deciding to cancel or forgive some of the money you owe them. Why would they do this? Typically, lenders write off debt when they believe there is little chance of them collecting it.
However, remember that a debt write-off does not mean a clean slate. It may still affect your credit score. With damaged credit, you might find it harder to access credit in the future. Additionally, sometimes, a debt collector may become involved in trying to recover it.
Writing off debt may provide a tax benefit for businesses—personal debt, on the other hand, maybe written off through bankruptcy or a settlement.
Types of Debt That Can Be Written Off
Dealing with financial stress is always challenging. Especially when trying to lower your debt with no end in sight. Writing debt off is possible, but the process isn’t always straightforward. Let’s break down the common types of debt and how one can write them off.
Credit Card Debt
Credit card debt is one of the most frequently written-off types. Credit card companies might give up on collecting the total amount from you if you cannot make payments for an extended period.
One outcome of writing off credit card debt is getting a settlement agreement. In this situation, a lender agrees to accept less than what is owed. In more extreme cases, a borrower can file for bankruptcy, which excuses a portion of the total amount of debt.
Medical Debt
Hospitals and healthcare providers may be willing to negotiate medical bills. Sometimes, they may even forgive them, especially when a patient faces extreme financial hardship.
Tax Debt
While it is far less common, writing off tax can sometimes be possible. However, the process is strict and involves you meeting specific criteria.
One option is to apply for an Offer in Compromise (OIC) with the IRS. In this case, you will negotiate to settle your tax debt for less than what you owe. However, not everyone can use this. To apply for an OIC, you must prove that paying the total debt would cause severe financial hardship.
Another scenario is bankruptcy, but this requires meeting stringent guidelines. For example, the tax debt must be several years old, and you must have filed tax returns on time for the years in question. Even then, not all types of taxes can be discharged in bankruptcy.
Student Loan Debt
Student loan debt is another tricky write-off. Federal student loans have some forgiveness programs, such as the Public Service Loan Forgiveness (PSLF). PSLF allows people working in a list of qualifying public service jobs to have their remaining balance forgiven. However, this is achievable after making 120 qualifying monthly payments.
In cases of permanent disability, you can write off debt due to illness.
Business Debt
When businesses face debt threatening their ability to operate, filing for bankruptcy or restructuring might be the solution.
Chapter 7 bankruptcy lets businesses liquidate assets, with proceeds going toward paying creditors. After the liquidation, all the remaining unpaid debts are typically written off.
There is also Chapter 11 bankruptcy, which allows for reorganization. This chapter might mean writing off certain debts or renegotiating payment terms.
How to Write Off Debt?
Writing off debt only sometimes means a clean slate. It often reduces what you owe and eases your financial burden. So, if you’re wondering how to write off debt, we’ve got a step-by-step for you below:
- List all your debts, amounts, and types (medical, student loan, credit card, etc.).
- Identify the lenders for each debt type.
- Contact lenders or creditors to discuss what happens when a loan is written off. They will likely inform you of possible options.
- If the lender agrees to the write-off, decide on the amount you can pay and request that the remaining balance be written off.
- Ensure any agreement or settlement is documented in writing.
Debt Write-Off vs Bankruptcy
Write-offs and bankruptcy are two common routes to eliminating debt without paying it. While both can offer relief to a person in debt, these concepts differ vastly.
A debt write-off is usually negotiated directly with the lender. In this negotiation, you agree to pay some of the money owed and get the rest forgiven. Write-offs are often seen as a quicker and more informal solution to getting out of debt.
On the other hand, bankruptcy is a legal process where you ask the court to discharge your debts because you cannot afford to pay them. There are different types of bankruptcy (some mentioned above), but this process can generally wipe out certain debts entirely. This would happen with the court’s permission, of course.
How Does Writing Off Debt Affect Your Credit Score?
Writing off the debt usually lowers your credit score. When a lender decides to write off debt, it typically gets labeled as a “charge-off” on your credit report. What does that mean? The label signals that you did not repay the total amount of your debt.
A charge-off can lower your score and stay on your report for up to seven years. So, while some may look for a write-off debt loophole to avoid repayment, it almost always affects your credit.
Writing off debt can be a relief but does not erase all consequences. There may be long-term effects on your credit and financial future. So, before deciding anything, explore all options available to you.
