Charged Off Accounts

[Anonymous]

I am trying to obtain a mortgage and was told by a lender that a couple of old accounts that were charged off are being reported incorrectly.  Specifically, the very same accounts that are listed as "charged-off" are simultaneously showing a balance equal to the amount that was charged off.  For these particular accounts, I did not settle for less than the full balance or make any payment at all.  This person's logic is that since the account was charged off, the balance should be listed as 0 because they wrote the debt off as a loss and sent me a 1099 for the amount of the charge off.  Instead, these two particular accounts are still showing a balance.  Is this person correct?  Do I need to contact the lender and request the balance be reduced to zero for reporting purposes?  Should I expect to see a score bump if reported correctly?

Thanks in advance.

[RobertEG]

Taking of a charge-off does not per se effect the debt balance.  It is an internal accounting measure, normally required under federal regulations, that moves a delinquent debt from the accounts receivable (asset) column of their accounting books to a non-asset, bad debt column, thus preventing creditors from inflating their stated assets to their stockholders or prospective investors.

The consumer still owes the entire debt, and may continue to report the debt balance to CRAs.

If a creditor, however, clearly cancels any debt obligation of a consumer, that is an additional issue that can require reporting of $0 balance to the CRAs.

Sending of an IRS form 1099c usually, as its name states, consitutes formal cancellation of the debt.

However, there is a long-standing contention by some creditors that they are required to issue a 1099c to a consumer in circumstances where they (the creditor) is not actually cancelling the debt.  It is based on an interpretation of the IRS regs, and can be reviewed by a Google search of the topic of form 1099c and cancellation of debt.

Thus, some creditors assert that they are NOT required to report a debt balance of $0 based solely upon having issued a 1099c.

My advice, if they are still reporting a debt balance after issuing a 1099c, is to file a formal dispute asserting that they have discharged the debt by issuing a Cancellation of Debt, form 1099c, and get their formal response/postion on record as to their interpretation of whether there is still a legit debt owed to them.

However, discharge of the debt, either by cancellation or its payment, does not negate the continued showing of the prior CO in your payment history, and thus wont have immediate score impact.

The impact would reside in termination of any future updates that continue to show a current delinquency status, such as CO or 180+ late, which would effectively extend the scoring impact since first delinquency of a delinquent debt.  After discharge, the effect of the prior derog reporting can thereafter begin to age. 

[spiritcraft1]

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@RobertEG wrote:

Taking of a charge-off does not per se effect the debt balance.  It is an internal accounting measure, normally required under federal regulations, that moves a delinquent debt from the accounts receivable (asset) column of their accounting books to a non-asset, bad debt column, thus preventing creditors from inflating their stated assets to their stockholders or prospective investors.

The consumer still owes the entire debt, and may continue to report the debt balance to CRAs.

If a creditor, however, clearly cancels any debt obligation of a consumer, that is an additional issue that can require reporting of $0 balance to the CRAs.

Sending of an IRS form 1099c usually, as its name states, consitutes formal cancellation of the debt.

However, there is a long-standing contention by some creditors that they are required to issue a 1099c to a consumer in circumstances where they (the creditor) is not actually cancelling the debt.  It is based on an interpretation of the IRS regs, and can be reviewed by a Google search of the topic of form 1099c and cancellation of debt.

Thus, some creditors assert that they are NOT required to report a debt balance of $0 based solely upon having issued a 1099c.

My advice, if they are still reporting a debt balance after issuing a 1099c, is to file a formal dispute asserting that they have discharged the debt by issuing a Cancellation of Debt, form 1099c, and get their formal response/postion on record as to their interpretation of whether there is still a legit debt owed to them.

However, discharge of the debt, either by cancellation or its payment, does not negate the continued showing of the prior CO in your payment history, and thus wont have immediate score impact.

The impact would reside in termination of any future updates that continue to show a current delinquency status, such as CO or 180+ late, which would effectively extend the scoring impact since first delinquency of a delinquent debt.  After discharge, the effect of the prior derog reporting can thereafter begin to age. 

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Hijacking an old thread to include comments by @RobertEG 

I have a 6 year old CO with USAA that was pretty large and reporting monthly a balance 40% higher than the original charge off.  They had sen me a 1099-C code "G" that states "decision or policy to discontinue debt" or something lik that.  I sent disputes last week with a letter including some language borrowed above and some case law.  TU has chosen to change the balance to ZERO as of today which is is great.

My question is in 12 months or so what will happen to this account?  Since it is a $0.00 balance now, will TU delete it or do the lates go away and will it the then stay on my report for an additional 3 years as a positive credit line?

Thank you!