What it means when a debt is 'written off'

It can linger until the statute of limitations runs out -- and even after

By Gary Foreman

The New Frugal You

Gary Foreman is a former financial planner who currently edits The Dollar Stretcher website and newsletters. He writes "New Frugal You," a weekly Q&A column about frugal living, for CreditCards.com Ask a question. 'New Frugal You' archive

Dear New Frugal You,
I had an old debt that I thought was dead but now I'm not so sure. A store said I owed them $900. I disputed the debt and how they tried to collect it. About four years ago, I understood that they "wrote off" the debt and assumed that would be the end of it. But just this week a law firm called and said that I not only owed the $900 but an additional $1,600 in interest! Can they do that? And what can I do to stop them? -- Talia

Dear Talia,
Good question! And it's a topic that's frequently asked about, in part because it's really a couple of different questions, and because many people don't understand some of the terms.

So let's break it down into bite-sized pieces. First, we'll look at what a write-off means. Then we'll discuss how you can tell if you still owe a debt and, if you do, how much interest they can charge. Finally, we'll spend a moment on what debt collectors can say or do.

The term "write-off" is really just an accounting term. What it means is that the lender doesn't count the money you owe them as an asset of the company anymore. Its financial statements will reflect that change. They're required to write off certain bad loans so as not to mislead investors.

So your debt was just written off of one credtitor's books. It hasn't gone off and died, however. Rarely is debt forgiven or forgotten. You still owe the money. The main consequence for you is that there's a good chance that the company reported the write-off to the credit rating agencies, which would hurt your score.

Whether you still owe the money or not is a more difficult question and is tied up in state law. Leslie H. Tayne is an attorney concentrating in consumer debt resolution and bankruptcy alternatives in New York. Tayne told me the only way to know for sure that a debt is forgiven is if, "you are either issued a 1099-C forgiven debt form or you get a letter from the creditor stating the account has been resolved. Otherwise it may not have disappeared."

If you don't have either, you still might be off the hook. It's possible that the debt might have exceeded the statute of limitations. Most states say that you can't be held responsible for an unpaid debt forever. So they set the length of time that a lender has to sue the debtor for repayment. During that time, the lender can get a judgment against the debtor. After that time, their ability to collect is limited.

Each state writes its own statute of limitations for credit card debt. In most cases it's between three and six years, although in four states it's seven or more years.

I have two warnings about debt and the statute of limitations:

• Be cautious when communicating with others about an old debt. You need to be careful not to restart the statute's "clock" -- the time during which a creditor can successfully sue. Depending on your state law, doing things such as making a partial payment or even acknowledging that you owe the money may reset the clock to zero. Restarting the clock is also known as re-aging a debt.

• Once the clock runs out, remember that the statute of limitations does not prevent a collection agency from trying to collect the debt. They can't take you to court, but they can call or write.

Can they legally charge you $1,600 in interest and penalties? According to Tayne, that "depends on the agreement and the status of the account, if there is a judgment and the state."

You can begin searching for an answer by calculating to see if the interest rate and penalties are consistent with the original loan agreement. The amount seems like a lot (and it is), but it doesn't take long for a monthly $30 late fee and 25 percent interest rate to add up. If the charges are above what's allowed in your agreement, it's time to check with a state agency or hire an attorney.

What can you do to stop debt collectors? As long as they're within the law, there's not much you can do to keep them from adding additional fees and interest to your account. If you're past or close to the statute of limitations, your best bet is probably to wait for it to run out and hope that they don't sue to get a judgment.

While you can't keep them from adding penalties and interest, you can do something to stop them from calling you. Debt collectors are required to abide by the Fair Debt Collections Practices Act. The bottom line is that you can tell them to stop contacting you and they must comply.

Don't be overly impressed because it's a law office that called. Chances are you weren't speaking with a lawyer. You were probably talking with someone who's trained in collecting bad debts.

One final thought. If you should decide to settle the debt, make sure you get the agreement in writing. It should say that you're no longer responsible for the debt or any interest or penalties. It should also state what will be reported to the credit scoring companies.

See related: Repaying charged-off debts

For more than 35 years, Gary Foreman has worked to help people get the most for their money. Prior to founding The Dollar Stretcher.com, he was a financial planner and purchasing manager. Gary began The Dollar Stretcher website and newsletters in April 1996. Today the website features more than 6,000 articles on different ways to live better for less. Gary has been interviewed by The Wall Street Journal, The Nightly Business Report, USA Today, Reader's Digest and other newspapers and magazines. Gary answers a question about a budgeting or saving issue from a CreditCards.com reader each week. Send your question to The New Frugal You.

Published: August 16, 2012

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