Default, Charge-Off, Collections, Statute of Limitations, Waiver of Debt (1099-C)

There are so many words and terms floating around when it comes to money owed. Take a look below for some everyday explanations about these terms.

Default

This means that you have failed to keep up with the terms of your contract. This could mean many things, not necessarily related to money. For instance, with a home loan, there is typically a condition to maintain insurance on the property. If you fail to do so, you would be in default of the contract. In the sense of most debt obligations, it means that you failed to pay on time, or pay enough.

Charge-Off

This is more or less an accounting term. At some point the creditor has to decide that they do not expect payment on that account and so they charge it off of their accounts. This is usually around 180 days/6 months after default.

This does not mean that they do not want to be paid, or that you do not owe the money. It simply means that from a practical accounting sense, they have to tell people that they cannot count on that money.

Collections

This is a less formal term, but frequently used in discussions and sometimes seen on credit reports. This means that the creditor has decided to take some action to collect on the account. This could mean an internal collection department, a third party collector, or even a law office.

Collectors use many methods to collect on these debts and they must follow the federal and state laws. You can expect, calls, letters, and perhaps even a lawsuit once the account is in collections.

Statute of Limitations

This is the amount of time that a creditor has to file a lawsuit against you. If they wait too long to come after you legally, then they have lost their right to do so. In California, a breach of contract claim must be brought within four (4) years of the breach. In most consumer credit cases, the collector has four (4) years to bring an action. If a creditor tells you something different, they may be lying to you and that would violate the collection laws. Not only could this possibly get the debt waived, but also the collector may have to pay you.

Waiver of Debt (1099-C)

Some creditors decide (or it is negotiated) to waive the debt. In this instance, the creditor does its own internal accounting to reflect this, but they will also submit a form to the IRS to let the government know that 1) they are loosing money and 2) they lost it to you.

The IRS sees waived debt as income to the person who would have owed the money. If someone loans you money, then later decides that you do not have to pay it back, then the original loan was really a gift or income and can be taxed.

If you get a 1099-C keep track of it and make sure you know what debt it goes along with. There has been a recent increase of instances where creditors waive the debt and still transfer the debt to another creditor to collect from you. This is illegal and you can bring an action against the creditors for that behavior.

If you have any questions about any of these topics, do not hesitate to contact Jessica at Hyde & Swigart to discuss these topics and your particular situation.