Exact Answer: 3 to 6 Years
Writing off of the debt implies that the amount lent or spent on a project might never be returned to the firm. Usually, when a firm lends money or invests in a project, it does so to earn some profit on the investment being made or, at the least, to recover the principal amount. However, situations may arise that disable the borrower from paying the debt or invested amount.
In such a case, if the lender is sure that the principal invested would never be recovered, they can classify it as ‘debts written off’. There are many governmental regulations and norms which specify the length of the period after which the debt can be written off.
How Long Before A Debt Is Written Off?
The period after which the lending entity can write off the debts depends on the prevailing government norms of that country. Different countries and different states within a country have different regulations regarding this. However, generally, the debt owed is written off from the books of accounts after a loan remains unpaid and is not paid even after the past due date in three consecutive financial quarters.
When any debts are written off, it negatively impacts the balance sheet of the organization. It means that the bank is set to lose a great number of its assets. This makes the lender cautious and they sell these debts to a collecting agency.
Moreover, not paying back the debts on time also has adverse impacts on the financial position of the borrower. It impacts the credit score negatively making any other lending firm skeptical about lending to such a person. The late payment of the debts is shown on the credit report if such a person for a very long time.
The issue of hard inquiries stays on the credit report of the person for 7 years from the default while late payments are shown in the credit report for at least 2 years. The issue of an unpaid student loan can be shown in the report for 10 years. The Chapter 7 bankruptcies also last for 10 years on the credit report.
Type of Debt | Stays On Credit Report For |
Late payments | 7 years |
Hard inquiries | 2 years |
Unpaid student loans | 10 years |
Chapter 7 bankruptcies | 10 years |
Why Is A Debt Written Off After That Long?
An unpaid debt that has no prospect of being paid is fit for writing off. This is so because such debts only consume further resources. There is time, effort, and money being spent on trying to recover them while the prospect of getting them back is very low. This, there is a double loss for the lending firm, firstly, it losses the principal amount, and secondly, it spends its resources on unproductive goals.
Loans are the main source of generating revenue for the banks. However, if any loan is uncollectible or its collection is too arduous to execute, it would reflect poorly the books of accounts of the bank. The investors of the bank would be wary and the bank would face financial problems.
Banks do not favor writing off debts but do so after compulsion. They do not want to have a dirty balance sheet and so they tend to erase such debts from their books of account by writing them off. Financial institutions create separate provisions for writing off debts.
Selling the written-off debts helps the lender significantly minimize their probable losses. The duty of collecting debts now falls on the collecting agency and the financial institution is cleared from the problem of collecting such debts.
Conclusion
The act of writing off of debts is favorable to none, neither the borrower nor the lender. The borrower has their credit report negatively impacted if they fail to pay their dues on time and their debt is written off. This, the borrowers should try to pay debts on time.
On the other hand, the lending entity writes off the debt after the borrower fails to pay debts after three consecutive financial quarters. This helps them to have a clean balance sheet and stop the wastage of funds on those unproductive goals.