Writing Off Debt

• A write-off occurs when a creditor purges its accounting ledger of nonperforming accounts. The amount of time your debt must be delinquent before your creditor writes it off will vary depending on the company. Credit card companies, for example, typically write off noncollectable debts after six months whereas hospitals and doctors offices may write off unpaid balances much sooner. A write-off is a method for creditors to modify their financial records for tax purposes--it does not eliminate the debt.
  
  

Tax Benefits

• A creditor who writes off bad debts can reduce its tax liability to the Internal Revenue Service. By writing off the account, the creditor demonstrates to the IRS that the debt is noncollectable and, as such, gains permission to deduct the delinquent amount from its annual profits.
  
  After claiming a tax deduction for a delinquent account, the creditor must send the debtor a Form 1099-C noting the deduction. The debtor must then include the amount the company deducted in his income for the year when he files his taxes.
  
  

Selling Bad Debts

• A tax write-off is rarely the end of the debt. Once a creditor deems the account worthless, it can sell the account to a third party provided it includes the amount it receives from the sale as business income. Third-party debt buyers, often referred to as "collection agencies," then own the account and will contact you demanding payment for the full amount.
  
  If the original debt incurred interest charges, such as a credit card debt, once the collection agency purchases it, the company can continue to add interest charges to your account until you pay it off or the collection agency gives up collecting the debt and sells the account to yet another debt buyer.
  
  

Consequences

• If the original account appeared on your credit records, having the debt written off, will hurt your credit scores. Not only does the write-off itself hurt your credit, but the payments you failed to make prior to the write-off also negatively affect your scores.
  
  Creditors and collection agencies alike can continue to pursue you for payment after writing off the debt. Common forms of collection activity for previously written off accounts include written and verbal payment demands, lawsuits and garnishment.