Extinguished DebtCredit Repair Definition
Debt that is considered legally settled or removed, often through repayment, settlement, bankruptcy discharge, or expiration of the statute of limitations.
Definition
Extinguished debt refers to a debt obligation that is legally considered settled, canceled, or no longer enforceable against the debtor. Debt can be extinguished in several ways: (1) Full Repayment: Paying the entire amount owed. (2) Settlement: Agreeing with the creditor to pay a lesser amount to satisfy the debt (though this may have credit and tax implications). (3) Bankruptcy Discharge: Elimination of the debt through a court order in bankruptcy. (4) Statute of Limitations Expiration: The legal time limit for the creditor to sue for collection expires (though the debt may still exist morally, it's legally unenforceable through the courts). (5) Forgiveness or Cancellation: The creditor voluntarily cancels the debt. Once extinguished, the debtor is generally released from the legal obligation to pay.
Frequently Asked Questions
Does debt automatically extinguish when the statute of limitations expires?
Expiration of the statute of limitations extinguishes the creditor's right to sue you for the debt, making it legally unenforceable through court action. However, the debt itself doesn't technically disappear; collectors might still attempt to collect (though they must comply with FDCPA rules about suing on time-barred debt), and it might still appear on your credit report for up to seven years from the original delinquency date.
If a debt is extinguished through settlement for less than the full amount, are there tax consequences?
Yes, if a creditor forgives or cancels $600 or more of debt as part of a settlement, the forgiven amount is generally considered taxable income by the IRS, and the creditor may issue you a Form 1099-C (Cancellation of Debt).
How does extinguished debt appear on a credit report?
It depends on how it was extinguished. Paid-in-full accounts show a zero balance and 'paid' status. Settled accounts show a zero balance but a 'settled for less than full amount' status (negative). Debts discharged in bankruptcy are noted as 'included in bankruptcy' with a zero balance (very negative). Debts past the statute of limitations may still show the delinquency history for up to seven years.
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