Transcript
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Ralph: We received this question from one of our listeners.
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Listener: Hey Ralph, my husband and I have been going through some really rough times, and our credit cards are getting out of control.
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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.
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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.
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I don't even know where to start, so I thought, This could be a good topic for your show.
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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.
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Ralph: Have you ever had a credit card charged off or forgiven?
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Do you know how this can impact you financially and your taxes?
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We'll stay tuned to find out we're going to break it all down for you on today's show.
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Welcome listeners to our financial Friday show.
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I'm so glad you chose to join us.
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I just want to thank you for listening and supporting our program.
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As we continue to grow
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today, we're discussing a financial and many people don't know the tax impacts when a credit card is charged off or forgiven.
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Might seem like a great situation, but you need to understand the impacts of this.
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Getting a credit card charged off or forgiven can be emotionally freeing.
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It is a great feeling, but it also comes with some important financial and some tax considerations that you need to be aware of.
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I will also mention that I did a show about two weeks ago about effective strategies to reduce your credit card debt.
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So be sure to check that out, it may prevent you from having to go down this road altogether.
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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.
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So I guess spring is actually making an appearance.
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And don't forget to tune into tomorrow's show.
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When I have a lively interview.
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With Mark Lawley.
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He and Krista do, what's called the practical prepping podcast.
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We talked about the state of the economy and ways to prepare yourself for what we both believe is a rough economic time ahead.
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You can check out their podcast at practicalprepping.info.
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Tomorrow's a show you don't want to miss.
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And I also highly recommend you check out their show.
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It is a great show about practical things you can do to always be prepared.
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So let's start with today's Bible verse.
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This is from the book of Isaiah chapter 43, verses 18 and 19.
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And it says this, forget the former things do not dwell on the past.
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See, I am doing a new thing, but that was rather apropos for today's episode.
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So first let's define what a charge off is and what debt forgiveness means.
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Yeah, of course I made an assumption.
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Everybody understands that.
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So when you stop making payments on a credit card for several months, the card issuers likely going to charge off your account.
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This means they remove it from their books as an asset because they no longer expect to collect that debt.
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You're basically not paying them.
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The debt still exists.
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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.
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Debt forgiveness is when a credit card company agrees to accept less than a full balanced owed as a payment in full.
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They are forgiving a portion of the debt.
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This usually happens through settlement negotiations or bankruptcy.
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This may be a situation when you call the credit card company and say, listen, I just can't afford to make these payments.
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Will you accept a settlement?
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That's what we call debt forgiveness, but it has some strings attached to it.
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And that's what we're going to talk about on today's show.
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Now what happens when your credit card debt is charged off for forgiven?
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Here's some key things that you need to know and understand.
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And this one is the biggest one.
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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.
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Even after debt forgiveness, it can still impact your credit for years.
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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.
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So it's going to affect your credit.
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Number two, you may owe taxes.
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Under IRS rules if a lender forgives $600 or more of your credit card debt.
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They're required to report this as taxable income.
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You'll get what's called a form 1099C.
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And you have to pay income taxes on that forgiven debt amount.
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there are some exceptions like bankruptcy, but you got to make sure you understand the tax implications.
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You want to meet with a tax expert to talk about this.
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One of the other things is insolvency.
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Number three.
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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.
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What is garnishment Ralph?
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Well, that's where they might come out and try to attach your wages.
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They have several years to pursue this.
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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.
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Number five, it may impact your career.
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Some employers now check your credit.
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So a charge off could hurt your job prospects in certain fields, especially government banking or finance roles.
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Many people don't realize that, but credit scores and credit reports are used for employment.
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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.
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Now, what can you do to deal with a charge-off or forgiven debt responsibly?
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Maybe this is the best decision.
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Here's some tips to how to deal with it.
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In a responsible way.
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Number one.
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You want to negotiate with creditors before charge-off work out a payment plan or offer a settlement?
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This looks a lot better than an.
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Unpaid charge off.
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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.
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Maybe we can work out a payment plan.
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It's certainly a lot better than a complete unpaid charge off.
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I mentioned a few minutes ago.
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It might say.
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Settled for less than the full amount, but that certainly looks better than a complete charge off
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number two.
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And I mentioned this a second ago.
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Get tax advice about forgiven debt.
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Consult with a tax professional, like myself to understand if you'll owed taxes.
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And how to manage it.
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If you think about it from a logical perspective, let's say they charge off a $10,000 credit card.
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Well, you're not going to pay $10,000 in tax.
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It will be $10,000 worth of income based at your tax rate.
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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.
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Number three, continue paying on your other carts.
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Keep other accounts, good standing to start rebuilding your credit.
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That's one of the things you have to think about if you unfortunately find yourself in this role, like this listener today.
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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.
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Next thing you want to do is contact credit bureaus.
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Make sure the charge off off status is being reported correctly.
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And dispute any errors.
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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.
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Number five, you need to improve your credit mix.
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Over time, add new positive accounts.
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Maybe that would be a secure card or an installment loan.
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You want to demonstrate that you can handle credit again?
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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.
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Next thing you want to do is number six, consider some legal options.
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If sued over the debt, don't ignore it.
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Explore protections like bankruptcy to eliminate the debt.
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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.
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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.
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The most important advice is to be proactive.
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Don't wait for charge off to happen unexpectedly.
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If you're struggling with credit card debt, just like this.
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Listen today.
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Deal with it early on.
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Create a debt repayment plan.
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Consolidate or negotiate lower payoffs and protect your finances and credit before further damage occurs.
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So before we wrap up on remind all of our listeners to visit our podcast page, do that at askralphpodcast.com
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.
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.
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We'd love getting calls from our listeners with future questions.
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We want to help you.
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If we know what you want to talk about, we can help even better while you're at our website.
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Make sure you join our email list.
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So you get our daily emails talking about what the show topics are.
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If you have a specific tax or financial consulting question, you can also schedule time with me right there on the website.
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Now, here's my ask for today.
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I want you to share this episode.
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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.
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So let's recap a bit with God's guidance and wisdom from the Bible.
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We can make good financial decisions, even after mistakes.
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The book of Proverbs chapter 22 verse seven, warns that the borrower is a slave to the lender.
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So be vigilant about avoiding unmanageable debt that could lead the charge offs.
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In closing my friend's credit card, charge offs and debt forgiveness can significantly impact your finances.
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Your credit and your taxes for years, you want to seek help early before an account becomes delinquent.
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If your debt is forgiven work positively to rebuild your credit and manage your tax obligations.
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And most importantly, reflect on how overspending may have contributed.
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And realign your money habits with biblical principles of stewardship.
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Discipline and wisdom.
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We talk about all of those things on the show.
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So visit askralphpodcast.com for more resources on improving your financial health from a Christian perspective.
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Please subscribe to our show rate and share this podcast.
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If you found it helpful, there's over almost 400 episodes now out there.
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So stay financially savvy my friends and may God bless you abundantly today.
