If your debt is discharged, do you still owe it?

I recently read an online forum which said that a creditor charges off a debt once it’s turned over to collections. What’s more, I gathered that a person does not have to repay this debt and can write “cancelled” on any invoices received from a collection agency instead of paying the bill. Is this information correct?

Unfortunately, the Internet is often a source of misinformation.  If you opt to write “cancelled” on a invoice for a debt you legitimately owe, you may find yourself being sued.  If you’re already dealing with the fallout from past debts, getting sued will only further complicate your situation.

Many people use the words cancelled, charged-off and forgiven interchangeably, but they have different legal meanings.  If you are uncertain of the status of your account, you need to clarify if the creditor is truly forgiving the debt or just charging it off.

When a creditor decides to charge off a debt, the creditor believes that you will not pay what you owe.  However, a charge off represents an accounting entry, and does not indicate that your debt has been cancelled or forgiven. Even after a debt has been charged off, you still owe the money, so a creditor may choose to send your account to a collection agency.

On the rare occasion that a creditor would forgive or cancel a debt, a person is no longer legally responsible to pay it.  However, anytime a debt is forgiven, the IRS considers this income. You would be responsible for declaring this on your taxes.  If a creditor forgives a debt, you would receive form 1099-C from the creditor.

When you borrow money, you are legally obligated to repay it. As a consumer, you do not get to decide whether or not to cancel, forgive, or charge off a debt. The creditor that extended you credit owns the debt and decides how it will handle your account. The only exception would be if you file for bankruptcy, and then bankruptcy laws would regulate how the account is handled.  If what the forum said was true, consumers all over the country would be cancelling their debts.  This would cause creditors to stop extending credit because consumers would not be repaying what they borrowed.

If you owe a debt, the best thing you can do is to make arrangements with the creditor to pay it before it gets charged off. If the account goes into collections, then you need to make arrangements to pay the collection agency.

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