28 Feb You Still Owe “Charged Off” Debts
What does it mean when collectors threaten you with ‘charge off’. Sounds serious doesn’t it? The dirty little secret is that a “charged off” debt has nothing to do with what is owed. “Charge off” means that the creditor is taking a tax deduction from their income tax. With $450 million earned each day on late charges alone, you can imagine that the credit industry wants a few deductions of their income. Just because the creditor is taking a tax deduction, it does not mean that you do not owe the debt.
Collectors like to use fancy terms to threaten debtors and the term ‘charge off’ does appear on your credit report. However, it is mostly meaningless. The creditor can continue to try to collect the debt. If for some reason you pay the debt, the money recovered is now all income to the creditor to offset the tax deduction taken in the past. This is why charged off debt is usually sold off to third party collectors for pennies on the dollar. That way the creditor never realizes income and the new collector collects money on its investment, essentially a capital gain which is usually taxed at lower rates than income.
“Charge Off” is really just a tax dodge. Meanwhile you still owe the money you always owed and the only thing that might have changed is to whom you pay the debt.