Charge-Off Definition

• A charge-off, also called a write-off, is an extension of credit that is not likely to be repaid. The outstanding amount owed on the account is considered a bad debt and may reduce the taxable income of the lender. A charge-off is an internal method of accounting that does not eliminate the legitimacy of the debt. Lenders may choose to sell charge-off accounts to debt buyers or to assign the accounts for collection to debt collection agencies. Charge-off accounts may also lead to a judgment against the consumer.
  
  

Settled Debt Definition

• When a lender decides that a debt is not collectible in full, it may choose to settle the debt for less than the amount owed. Settled debt, also called forgiven debt or cancelled debt, may not be sold to a third party or used as part of a lawsuit against a consumer. When a debt is settled, the lender closes the account and does not seek further payments from the consumer.
  
  

Tax Implications

• Charge off accounts may reduce a lenders taxable income, but these accounts are not considered income to a consumer. Settled debts in excess of $600 are considered unearned income to the consumer and must be reported as such during the tax year the debt was settled. Typically, lenders issue a 1099-C to the Internal Revenue Service and to the consumer that lists the amount of the settled debt. Settled mortgage debt, such as after a foreclosure, may not count against the consumer as income if it does not exceed $2 million and if it occurs in the calendar years 2007 through 2012.
  
  

Credit Implications

• Lenders typically report charge-off accounts to at least one credit reporting agency, creating a negative entry on the consumer’s credit report. The Fair Credit Reporting Act allows consumer credit reporting agencies to report negative information for seven years. If the lender sold or assigned the charge-off, the debt buyer or collection agency may also report the account to the credit bureaus, creating a second negative entry that will impact a consumer’s credit score. Settled accounts may also be reported to the credit bureaus and listed for seven years, but settled accounts are closed and will not incur a second listing by a debt buyer or collection company. Consumers may also be able to negotiate with the lender for removal of the negative listing from their credit report as part of the settlement.