Question about BK timing as it relates to CC charge-offs and tax liability

[marmaduke]

Hello all,

I have searched but could not find an answer to my question.

From what I read, credit card companies charge-off the debt at 180 days. I also understand that they notify the IRS and the charge-off becomes taxable. My question is: Do you have to file BK before the debts are charged off to avoid tax consequences? Thanks,

Marmaduke

[HHM]

Not sure where you heard that, but that is NOT the case.

Charge-off is the most misunderstood terms by the general public. Charge-off is simply an accounting entry that is required by numerous regulatory agencies for various reason (no need to detail it here), but primarily has to do with the accuracy of the lenders financial position for various disclosures. For most major creditors, they are required to charge-off an account after 6 months if no payment has been received. That does NOT mean the debt is forgiven. Tax liability for you is only triggered if the debt is forgiven. Forgiving a debt means the lender releases your liability. Charge-off DOES NOT release your liability. The debt is either assigned to a collection agency or sold to a debt buyer to collect.

In regards to your question, there really is no tax consideration when it comes to filing BK and charge off. The only "minor" consideration for filing BK before or after charge off is credit reporting. If the debt is charged-off prior to you filing BK, the charge off stays on your credit report. If you file BK before charge off, the debt gets reported as included in BK, which, in the long run, is slightly better then having the charge-off AND having the BK.

[nceguyfromne]

I think you are confusing charge-offs with debt forgiveness. They are not the same. Charge-offs do offer certain tax incentives to the creditor but unless the creditor is officially 'forgiving' the debt and dropping any future option to sue you or sell the debt, you should not have tax implications. Most creditors are not going to completely drop their claim on a debt after 180 days.

[marmaduke]

Not sure where you heard that, but that is NOT the case.

Charge-off is the most misunderstood terms by the general public. Charge-off is simply an accounting entry that is required by numerous regulatory agencies for various reason (no need to detail it here), but primarily has to do with the accuracy of the lenders financial position for various disclosures. For most major creditors, they are required to charge-off an account after 6 months if no payment has been received. That does NOT mean the debt is forgiven. Tax liability for you is only triggered if the debt is forgiven. Forgiving a debt means the lender releases your liability. Charge-off DOES NOT release your liability. The debt is either assigned to a collection agency or sold to a debt buyer to collect.

In regards to your question, there really is no tax consideration when it comes to filing BK and charge off. The only "minor" consideration for filing BK before or after charge off is credit reporting. If the debt is charged-off prior to you filing BK, the charge off stays on your credit report. If you file BK before charge off, the debt gets reported as included in BK, which, in the long run, is slightly better then having the charge-off AND having the BK.

Thanks for the explanation HHM.

I know that I definitely have to file at some point (lost job, business, disabled, old and very confused!) I still have some personal assets that will have to go to the estate for sale. I have family members who want some of these but it will take time to come up with the money (fair market value) to buy them before I file. I do not know if this will cause problems and I will consult an attorney before I do a sale. I think that I would have to turn over the cash receipts from the sale if I can't exempt them or spend the receipts for reasonable living expenses before I file. Am I on the right track?

[marmaduke]

I think you are confusing charge-offs with debt forgiveness. They are not the same. Charge-offs do offer certain tax incentives to the creditor but unless the creditor is officially 'forgiving' the debt and dropping any future option to sue you or sell the debt, you should not have tax implications. Most creditors are not going to completely drop their claim on a debt after 180 days.

Thanks for the response. All of this BK stuff is like a foreign language... for 60+ years I just worked, spent the money, paid the bills. I never pictured myself facing BK but then at least I am still here! Thanks again
Marmaduke