Charged Off Debts Can Cause Clearance Denial or Revocation

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There is a common misperception among security clearance applicants regarding the requirement to disclose or resolve charged off debts. Many believe when creditors charge off a debt then they are no longer indebted. Not true! Here is a simple definition of the term: a charge-off is a debt that a creditor has given up trying…

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I also heard a story about someone who got some debt written off (or whatever the correct phrase is) and then got in trouble for not reporting it as income!

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When debt is forgiven, the client should receive a 1099-C during the next tax filing season. Many lose or ignore this form since they have no idea about any tax paperwork other then a W-2. The amount of debt forgiven must, in most cases, be treated as income. There are, however, exceptions and it certainly may be worthwhile to consult a professional before filing.


Hmmm, understood tax law and definition is different than national security. It would seem if the government treated the charge off as income, and you paid tax on this amount…it would then constitute settled debt. But one definition for an agency isn’t applicable to the next. Certainly I would tell an applicant to speak to it on the form. I would like to know if the credit score had since recovered. We had several clearances held up for people with 800 credit scores, current credit agencies showed no record of an uncollected and challenged debt to Sprint. Yet the BI person had a report showing the amount. If a consumer cannot get access to see the debt and the scores are in near perfect range…again I would consider it a settled matter. Of course demonstrating over time one is not reliable for things they charged paints a bigger picture, not willing to follow established rules of society, etc.

I love interacting and learning on this forum. I thank all of you for making me a better FSO. It is good to find concurrence in interpretation, but dare I say, when challenged…and I learn I was wrong…those are the ones that stand out. I appreciate those moments in life.

Two different things . . . Forgiven debt and charged off debt.

Charge offs do not affect your tax return and you will not receive any notification from the debtor that you bill is being charged off. In addition, you still owe the money.

Forgiven debt is usually the result of a negotiated settlement with the debtor. You owe $7000, pay $3000 and $4000 is forgiven? You don’t owe any more money and you will receive a 1099-C ("C"ancelled debt) to report the forgiven debt as income on your taxes.

BOTH will show up on your credit report and both will be questioned during your investigation.


Ahhhh tracking. That makes it clear.

The 1099-C enables the creditor to take the ‘loss’ on the debt-holders (now) ‘income.’

This makes perfect sense.