CHARGE OFF DEBT VERSUS WRITE OFF DEBT

 

 

What is the difference between a write off of a debt and a charge off of debt? The short and easy answer is: WHY DO YOU CARE, YOU STILL OWE THE MONEY.

Charged Off Debt or Written off Debt commonly referred to as either a charge off or a write off is a bookkeeping function performed by all accrual basis taxpayers. I would bet that most of the people reading this are not accrual basis taxpayers, but, are cash basis taxpayers.

An example of how income is treated is explained by the following example:

You have vacation time which is owed to you and you ask the boss can you take the money and still work or must you take the vacation time.  It is getting close to the end of the year and business is booming. The boss really needs you and is happy to both pay you for your work and to pay you for the vacation time you have not taken.

When you must report the income is controlled by whether you are an accrual basis taxpayer or a cash basis taxpayer.

  • Example of a Cash Basis Taxpayer.

The employer agrees to give you the money and you have the right to receive the money.  Because this is a big company, it takes a while to get payroll to cut the check.   As a cash basis taxpayer, if you do receive the money before the last day of the year, the money is included as income on the tax return for this year.  However, if your employer does deliver the money to you until the first day of the next year, you do not report the taxes until the following tax year.

  • Accrual Basis Taxpayer

An accrual basis taxpayer has to claim the money as income in the year he had the right to receive the money, even though the money may not be received until the following tax year. The liability of an accrual basis taxable income for taxable income is determined by when the right to receive the income and not the actual receipt.

Whether you are an accrual basis or cash basis taxpayer is determined by the rules of The Internal Revenue Service. Most businesses who lend money are required to report taxes on an accrual basis. Accrual Basis tax rules supposedly makes it more difficult for these entities to game the system by either pushing expenses into a different tax year or to hold off reporting income until a different tax year.

  • The Write Off or Charge Off:

The company that you owe money to has finally figured out that you are not going to pay it. The right to receive has already been booked and the company may have even paid taxes on the income. Now the company wants to take back the reported profit since it is not going to get paid by you. No company or person wants to pay taxes on money it will never receive.

The next step for the company is to write off or charge off the debt so that the creditor can reduce its income. When new income comes in, whether it is received or not, the creditor is able to cancel income it is now receiving against the written off or charged off debt.

Going back to the beginning, what is the difference between a charge off or write off? As I said at the beginning, you do not care because nothing abut this process causes you to not owe money to the creditor.

There is no release of you from liability for the debt unless something else occurs. That something is called many things, a release, settlement, loss mitigation, something I have forgotten or that the Statute of Limitations has expired on your liability for the debt.

  • WRITE OFF OR CHARGE OFF DOES NOTHING TO LIMIT YOUR LIABILITY FOR PAYMENT OF THE DEBT. WHEN A DEBT IS WRITTEN OFF OR CHARGED OFF, YOU MAY EVEN HAVE LIABILITY FOR TAXES FOR THE MONEY YOU DID NOT PAY BACK.

The issue of liability for taxes when a debt is written off or charged off is saved for another day.

About Nathan Davis, Esquire

Born in Charleston, South Carolina, Nathan Davis has been practicing law for many years. Mr. Davis has a wide variety of experiences having practiced domestic relations, criminal law, social security law having also practiced collection law in the past. This knowledge is helpful when someone needs to restart their financial life. The practice is now primarily bankruptcy and debtor representation work, but, Mr. Davis continues to also practice real estate law, trusts and estates and a general litigation practice. I believe that the most important part of representation is trying to leave you better off when the case is finished than when you started. Although I will do as my client directs, I will always tell you if I think that you are making a mistake. Bankruptcy is about a "fresh start". If you do not make changes in what you are doing, you will be doing what you are doing now in the future. There is no shame in bankruptcy or other steps that you may take to start your life over. Too often, people worry more about things than about themselves, their family or their future.
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