Life can throw you curveballs, and unfortunate life events like divorce, job loss, chronic illness, and an economic downturn can make it difficult for one to honor their financial obligations. And when you try to get back on your feet, you find yourself accruing a lot of credit card debt in the process. In such situations, many people have dallied with the question; can credit card debt be written off?
There is no definitive yes, or no answer to this question. To better understand this situation, you’ll first need to know how credit card debt collection works. It will give you insight into how credit card debt is written off. So let’s get started.
How Does Credit Card Debt Collection Work?
When you fail to make payments on your credit card, you will receive collection calls and letters asking you to make payment. In the beginning, it will be the credit card company, for example, America Express, Chase or Bank of America, etc. They will do this for 30-90 days. Once this period lapses and they are still unable to collect their debt, they will engage a third party, a debt collection agency.
What Does the Collection Agency Do?
The debt collector will take it up to follow up until payment of the debt. So, what’s in for them? These companies get paid a percentage of the debt they collect, or they are paid a flat fee for their service. There are usually the annoying debt collectors who call you at dinner time and make you want to change your phone number. Aargh.
Now, what happens if the collection agency is unable to collect the debt? They will pass it to another debt collection agency, who will give it a try to recover the debt. So, what happens when all these collection agencies are unable to recover the debt?
In that instance, the original creditor (credit card Company) will sell off the credit to a debt buyer who will then pursue the debt. However, this is a rarity and is only done after 3 years of persistently following up on a delinquent account.
Credit card companies do not like taking this route because they do not want to lose their customers. The debt buyer will then pursue the debt themselves or engage the services of a debt collector. If they are unable to collect the debt, they can resell it to another debt buyer, and the cycle goes on and on. It then begs the question, does it ever stop, and can credit debt be written off.
Can Credit Card Debt Be Written Off?
Yes, credit card debt can be written off. However, this is on accounting terms only. When a credit card company cannot collect debt owned through all means possible, they write it off. By doing this, they declare it a worthless asset and deduct it as a loss in their accounting books. However, this does not mean the debtor off the hook yet.
How Long Does It Take Before Credit Card Debt is Written Off?
Just like you have seen above, a credit card company will write off debt when it becomes uncollectible. Each credit card company has its own rules and guidelines on when they term a debt uncollectable. That being said, how long your debt takes to be written off will depend on the credit card company, your assets, and your history on repayments.
Statute of Limitations
There is a limited period (7 years) within which a creditor can pursue payment of a debt through legal means called the statute of limitations for debt. This period varies from state to state, with some as high as 15 years. Once this time lapses, the creditor cannot pursue repayment through legal means. The debtor can then can expunge their credit report and have it clean.
Can You Get Away Scot-Free?
It may seem you can get away scot-free, however, it is not the case. For the 7 years in which you wait for the statute of limitation of debt to lapse, your credit score will take a hit. It will affect you from borrowing other loans, getting a mortgage, renting an apartment, buying a car, and in some cases, it may even cost you employment opportunities.
Do You Have Other Options?
When faced with a huge credit card debt, you may feel overwhelmed and do not know where to start. It is normal. Do not despair. Start by consulting a bankruptcy attorney who will advise you on where to start. Also, seek credit counseling to help you understand and manage debt.
At some point in life, you will face some financial challenges. It does not make you a bad person. All it means is that you will need to re-strategize and figure out a way forward. And in the case of credit card debt, it is best to talk to your credit card company early in case you will be missing out on payments. It will safeguard your credit score, and importantly, if you need access to other loan facilities in the future, they will be available to you.
Hilda is a freelance personal finance writer. She enjoys finding new money hacks and investing. Her dream is for everyone to achieve financial freedom in their lifetime.