Writing Off Debt: The Basics

It may be that writing off debt will be a viable solution to your current cashflow and credit card problems. Read on to learn more about the types of debt that can be written off, the benefits of writing them off, and also the negative effect on your credit rating of debt write-offs.

Types of Debt that Can and Cannot Be Written Off

Unsecured credit, such as bank credit card balances, department store charge cards and bank lines of credit, are the most common types of debt that are written off. Secured credit, like a mortgage or car loan, usually is not written off. Your home or vehicle is seized by your creditor to be sold to pay the balance of the loan or mortgage.

Benefits of Writing Off Debt

Interest will no longer accrue on the debt. Your payments will be reduced substantially, or your debt may be forgiven completely. If your credit rating is in good standing and you have fallen behind on no more than 90 days of payments, you may be able to negotiate a debt settlement with your creditors.

Negative Impact of Writing Off Your Debts

You will lose some or all of the credit cards and lines of credit you had. You may not be eligible for any new credit cards or personal loans for 7 years, depending on your income and employment status. Collection agencies may pursue you in writing, by e-mail and most often by telephone to attempt to collect the amount that you now owe them instead of your creditors.

When You Might Need to Consider Writing Off Debt

If you have lost your job due to illness or accident, such that you cannot work any more at your current type of job, or have been laid off suddenly with no prospect of being recalled to work, you should consider writing off your debt. Talk to a credit counselor while you still have work, as you will find it difficult to negotiate a repayment schedule with creditors if you have no verifiable steady income.

How to Proceed with a Debt Write-Off

Gather the most up-to-date information about your debt. Print off your statements from credit card companies, banks and department stores for the past 12 months. Trustees in bankruptcy and credit counseling agencies prefer to see a fiscal year's worth of statements rather than just 6 months' worth. Provide pertinent medical records about your illness or injury. You may be eligible for disability insurance payouts or a pension. Provide a copy of your layoff notice, your record of employment and employment insurance payment stubs to demonstrate your current income. Get a copy of your credit report, and make sure the information on it is correct. Obtaining your initial credit report, correcting it, and verifying the new credit report for accuracy can take up to 90 days.

What Happens Next

Most often, your creditors will write off part of the debt and set a payment schedule for you to repay the balance with no new interest charges. Occasionally, a creditor will forgive all of the debt and sign what is called an "individual voluntary agreement" with you so you will not have to make any more debt payments to them.

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