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When you're liable: Three different classifications of debt

If credit collectors, attorneys or buyers are knocking at your door, you probably have a debt to answer for. But, between the different terminology you may hear, it can become confusing to know how much you owe and whether you're still in debt.

Read on to learn more about what the following debt terminology means.

Charged off debt

Hearing that your debt has been charged off may lead you to the misconception that your debt is gone. This is not true. If there have been no payments made on a debt for over 180 days, a creditor "charges off" the debt by removing it from their books and reporting it to the credit bureaus to receive a tax exemption from the government. The report also shows other creditors that you are not likely to repay your debt.

You are still liable for repaying charged off debt. The creditor can either collect it through in-house operations or by selling the debt off to another debt buyer.

Debt forgiveness

Debt forgiveness ends your legal liability to pay back a creditor for a portion of debt you owe. This may also be referred to as debt that is "written off" or canceled debt.

Some of your debt may be forgiven by a creditor after meeting the conditions of a settlement agreement or payment plan the two of you have set.

You may still be liable for paying taxes on forgiven debt, depending on how the debt was canceled. For example, canceled debt is not taxable if you file for bankruptcy because debts discharged in bankruptcy are not considered taxable income.

A 1099-C cancellation of debt tax form must be sent by the creditor to the debtor and the IRS to official forgive the debt. The IRS requires that forgiven debts that exceed $600 are considered income to the debtor.

Discharged debt

Discharged debt is debt that is forgiven through bankruptcy. By filing form 982, this debt is excluded from your taxes. Otherwise, the discharged debt is the same as forgiven debt, as you are no longer legally liable for repaying it to a creditor.

Statutes of limitations for debt

Arizona's statutes of limitations prevent creditors from filing a lawsuit over an unpaid debt after six years for a written contract and three years for an oral, stated or open account. However, this timeline doesn't prevent creditors from collecting the debt from you.

Creditors can still request the money over the phone or in writing and you are still liable for repaying the debt, according to credit bureaus. Your credit score will continue to suffer for the unpaid debt.

Lasting consequences of debt

Debt that is charged off, forgiven or beyond Arizona statute of limitations is still reported to credit bureaus. Reports of unpaid debt affect your credit score for seven years.

To rid yourself of your debt, you can make a settlement agreement with your creditor. If you are unable to come to a settlement with your creditor, bankruptcy may be a light at the end of the tunnel.

A chapter 7 bankruptcy liquidates your assets to use as payment to creditors or a chapter 13 bankruptcy can be used to repay a debt by following a payment plan.

Contact an attorney to review your financial status and discuss your options to gain debt forgiveness and avoid tax liability.

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