Do You Pay Taxes When You Remove a Charge-Off?

There are no repercussions on your tax return due to an underpaid charge-off. Yet if you're able to settle your debt for less than the whole amount owed and get a charge-off, the situation changes.

Tayne explains that if you pay off your debt after it has been charged off and you save $600 or more, the creditor or collector is required by law to issue you a 1099-C. The difference between what you owing and what you settled for may therefore be deemed taxable income.

A Charge-Off Should Not Be Ignored.

If you have a charge-off on your credit report, it may be difficult to get approved for new lines of credit. "Many lenders, especially mortgage lenders, will not lend to customers with unpaid charge-offs and will insist that you pay it in full before you are approved for a loan," explains Tayne.

Although though it may be impossible to have a legitimate charge-off removed from your credit report, it is a crucial step toward credit restoration to find a way to make at least some payment toward the debt.

Whether you settle a charge-off or pay it off in full, "the major benefit is that you won't be sued for the debt and you stop accruing interest on the amount," explains Ulzheimer. "Moreover, you should feel proud that you solved the issue and won't make the same error twice," the author writes.

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