Credit card charge off and forgiveness

0:00 Ralph: We received this question from one of our listeners. Listener: Hey Ralph, my husband and I have been going through some really rough times, and our credit cards are getting out of control. We haven't even been able to make some of the minimum payments lately, and I got a call yesterday from one of the companies telling me that they are going to charge off the credit card. I am not even sure what that means, but someone told me that this could have a huge impact on my credit, and could even trigger some tax issues for my husband and I. I don't even know where to start, so I thought, This could be a good topic for your show. I don't want to make a huge mistake, but we really can't afford to pay these credit cards with the costs of everything going up, so I would really appreciate your help and ideas.

0:43 Ralph: Have you ever had a credit card charged off or forgiven? Do you know how this can impact you financially and your taxes? We'll stay tuned to find out we're going to break it all down for you on today's show.

1:23 Welcome listeners to our financial Friday show. I'm so glad you chose to join us. I just want to thank you for listening and supporting our program. As we continue to grow today, we're discussing a financial and many people don't know the tax impacts when a credit card is charged off or forgiven. Might seem like a great situation, but you need to understand the impacts of this. Getting a credit card charged off or forgiven can be emotionally freeing. It is a great feeling, but it also comes with some important financial and some tax considerations that you need to be aware of. I will also mention that I did a show about two weeks ago about effective strategies to reduce your credit card debt. So be sure to check that out, it may prevent you from having to go down this road altogether.

2:06 Before I start, I want to let you know, it's a beautiful sunny Friday morning here on the farm, and I understand the temps are rising. So I guess spring is actually making an appearance. And don't forget to tune into tomorrow's show. When I have a lively interview. With Mark Lawley. He and Krista do, what's called the practical prepping podcast. We talked about the state of the economy and ways to prepare yourself for what we both believe is a rough economic time ahead. You can check out their podcast at practicalprepping.info. Tomorrow's a show you don't want to miss. And I also highly recommend you check out their show. It is a great show about practical things you can do to always be prepared. So let's start with today's Bible verse.

2:47 This is from the book of Isaiah chapter 43, verses 18 and 19. And it says this, forget the former things do not dwell on the past. See, I am doing a new thing, but that was rather apropos for today's episode. So first let's define what a charge off is and what debt forgiveness means. Yeah, of course I made an assumption. Everybody understands that. So when you stop making payments on a credit card for several months, the card issuers likely going to charge off your account. This means they remove it from their books as an asset because they no longer expect to collect that debt. You're basically not paying them. The debt still exists. You still technically get owe it, but the creditor has decided to written it off because they don't want to continue to chase after you.

3:28 Debt forgiveness is when a credit card company agrees to accept less than a full balanced owed as a payment in full. They are forgiving a portion of the debt. This usually happens through settlement negotiations or bankruptcy. This may be a situation when you call the credit card company and say, listen, I just can't afford to make these payments. Will you accept a settlement? That's what we call debt forgiveness, but it has some strings attached to it. And that's what we're going to talk about on today's show. Now what happens when your credit card debt is charged off for forgiven? Here's some key things that you need to know and understand. And this one is the biggest one. Number one, Your credit score is going to take a hit and unpaid charge off can stay on your credit report for up to seven years, and it will severely damage your credit score.

4:13 Even after debt forgiveness, it can still impact your credit for years. Listen, folks what's going to happen effectively on your credit report is they're going to show a charge off and it's going to say received less than the full balance that will have a negative impact on your score. So it's going to affect your credit. Number two, you may owe taxes. Under IRS rules if a lender forgives $600 or more of your credit card debt. They're required to report this as taxable income. You'll get what's called a form 1099C. And you have to pay income taxes on that forgiven debt amount. there are some exceptions like bankruptcy, but you got to make sure you understand the tax implications. You want to meet with a tax expert to talk about this. One of the other things is insolvency.

4:53 Number three. You could still be sued even after a charge off the creditor or debt collector could still take legal action to try to recover the remaining debt through garnishment. What is garnishment Ralph? Well, that's where they might come out and try to attach your wages. They have several years to pursue this. And number four, your interest rate will spike any remaining cards will likely impose penalty pricing with interest rates above 30%, which makes it very difficult to get new credit. Number five, it may impact your career. Some employers now check your credit. So a charge off could hurt your job prospects in certain fields, especially government banking or finance roles. Many people don't realize that, but credit scores and credit reports are used for employment.

5:36 So you have to understand there some serious financial consequences to be aware of you don't just walk away from a charge off or debt, forgiveness, cleanly. Now, what can you do to deal with a charge-off or forgiven debt responsibly? Maybe this is the best decision. Here's some tips to how to deal with it. In a responsible way. Number one. You want to negotiate with creditors before charge-off work out a payment plan or offer a settlement? This looks a lot better than an. Unpaid charge off. I used to run a credit union and I would tell our members, if you're in financial distress, call us, we will be willing to work with you. Maybe we can work out a payment plan. It's certainly a lot better than a complete unpaid charge off. I mentioned a few minutes ago.

6:17 It might say. Settled for less than the full amount, but that certainly looks better than a complete charge off number two. And I mentioned this a second ago. Get tax advice about forgiven debt. Consult with a tax professional, like myself to understand if you'll owed taxes. And how to manage it. If you think about it from a logical perspective, let's say they charge off a $10,000 credit card. Well, you're not going to pay $10,000 in tax. It will be $10,000 worth of income based at your tax rate. So it still might be financially better to go ahead and allow that debt to be forgiven and you'll pay tax on a portion of that. Number three, continue paying on your other carts. Keep other accounts, good standing to start rebuilding your credit. That's one of the things you have to think about if you unfortunately find yourself in this role, like this listener today.

7:02 Where you're going to need to make some decisions, Make sure you keep other cards current so that you continue to build up your credit. Next thing you want to do is contact credit bureaus. Make sure the charge off off status is being reported correctly. And dispute any errors. I've seen this reported incorrectly on credit bureaus, and that's the kind of thing that will keep on coming back to bite you. Number five, you need to improve your credit mix. Over time, add new positive accounts. Maybe that would be a secure card or an installment loan. You want to demonstrate that you can handle credit again? This doesn't have to be the end of the story, but it's going to mean that you're going to need to take some time to do some rebuilding. Next thing you want to do is number six, consider some legal options. If sued over the debt, don't ignore it.

7:44 Explore protections like bankruptcy to eliminate the debt. Now I am not an attorney, so I don't want to give you any legal advice, but you don't want to just ignore it. If you get a letter in the mail, say you're being sued because they will get what's called a default judgment, and then there'll be able to attach your wages, even maybe levy your bank accounts. The most important advice is to be proactive. Don't wait for charge off to happen unexpectedly. If you're struggling with credit card debt, just like this. Listen today. Deal with it early on. Create a debt repayment plan. Consolidate or negotiate lower payoffs and protect your finances and credit before further damage occurs. So before we wrap up on remind all of our listeners to visit our podcast page, do that at askralphpodcast.com . As I always say there, you can leave us a review, share your thoughts, or even send us a message like this caller did today.

8:31 We'd love getting calls from our listeners with future questions. We want to help you. If we know what you want to talk about, we can help even better while you're at our website. Make sure you join our email list. So you get our daily emails talking about what the show topics are. If you have a specific tax or financial consulting question, you can also schedule time with me right there on the website. Now, here's my ask for today. I want you to share this episode. If you know someone who's struggling with credit card debts and considering a charge off or a debt forgiveness, have them listen to this episode and maybe they can get some guidance before they make that decision. So let's recap a bit with God's guidance and wisdom from the Bible. We can make good financial decisions, even after mistakes.

9:13 The book of Proverbs chapter 22 verse seven, warns that the borrower is a slave to the lender. So be vigilant about avoiding unmanageable debt that could lead the charge offs. In closing my friend's credit card, charge offs and debt forgiveness can significantly impact your finances. Your credit and your taxes for years, you want to seek help early before an account becomes delinquent. If your debt is forgiven work positively to rebuild your credit and manage your tax obligations. And most importantly, reflect on how overspending may have contributed. And realign your money habits with biblical principles of stewardship. Discipline and wisdom. We talk about all of those things on the show. So visit askralphpodcast.com for more resources on improving your financial health from a Christian perspective.

9:58 Please subscribe to our show rate and share this podcast. If you found it helpful, there's over almost 400 episodes now out there. So stay financially savvy my friends and may God bless you abundantly today.