What Happens When Banks Write Off Credit Debt?

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Banks can claim a tax credit when they write off a delinquent credit cad account -- but that doesn't take you off the hook. You remain liable for the debt until you pay it, and debt collectors have the right to come after you for the rest of your life.

Misconceptions

States have statute of limitation guidelines that determine how long a creditor or debt collector can successfully pursue legal action against you for not paying credit card debt. The length of time varies by the state, but the average is about six years, according to a chart published by BCS Alliance, a credit and debt website. However, a debt that has expired under your state's statute of limitations does not mean the end of the collection efforts. The debt collector can still come after you but loses his most powerful weapon -- the chance to win a judgment against you in court and possibly garnish your wages or bank account.

Time Frame

Banks generally close accounts and consider them written off after you fall six 180 days behind, according to MSN Money. The bank receives a tax break equal to 35 percent of the defaulted balance.

Expert Insight

Once the account is written off, the bank will assign or sell it to a debt collector or lawyer. Collection efforts will continue, up to and possibly including legal action in the form of a lawsuit.

Prevention/Solution

You can avoid the threat of a lawsuit by resolving your credit card account before or after the writeoff. According to MSN, banks are open to debt settlement offers just before your account is written off. By that time the bank has become convinced that you cannot -- or will not -- make the payments. At that point the back may agree to settle the account the account for less than the full balance. Settlement agreements vary, but MSN says the banks generally will not settle for less than the 35 percent of the balance that they could gain by simply writing off the debt. Settlement remains possible even after the account has been written off, MSN says. However, you may have to settle with a debt collection agency or a law firm instead of the original creditor.

Warning

It is imperative that you respond to a credit card lawsuit. The New York Times reported in October 2010 that most consumers who are sued for credit card debt never respond to the lawsuit. That makes for an easy victory in court for the credit card company or debt collector and can lead to swift garnishment of your wages or bank account. The Times said that by simply responding and fighting for your rights -- perhaps with the help of an attorney -- you could force the lawsuit to be dropped. You can also work out a last-minute settlement.

References

About the Author

Robert Lee has been an entrepreneur and writer with a background in starting small businesses since 1974. He has written for various websites and for several daily and community newspapers on a wide variety of topics, including business, the Internet economy and more. He studied English in college and earned a Bachelor of Arts in liberal arts from Governor's State University.

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