A year ago (October 2001), relative to an unpaid personally guranteed
bank loan to a California business, a Michigan bank obtained 2
non-appearance default judgements against the business owner
(individual) and the business (company). Given that the judgement has
not been satisfied (a) when would the bank write off the loan; (b)
what happens if you want to pay after it has been written off?

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Request for Question Clarification by aceresearcher-ga on 22 Oct 2002 21:08 PDT

geor, 

If you feel I have answered your question, I would like to post my
comment as an Answer. If you need additional assistance in determining
where the business owner needs to go to negotiate payback of the
outstanding balance, or you have any other questions, post the
information you do have -- such as bank name and location -- (do not
include account numbers or any of the business owner's personal
information), and I will be glad to help you.

Unfortunately, repairing one's credit can take some effort and a lot
of time. However, once 7 years has elapsed since the date the loan was
defaulted or written off (whichever is later), the defaulter can force
credit reporting agencies to remove the negative information from
their credit report. In the meantime, making good on the defaulted
amount is a really good way to improve the business owner's credit
report and credit rating until the 7 years passes. I hope you will
encourage the business owner to pursue this option.

I hope this response has provided you with the information you were
seeking!

aceresearcher

I used to work as the primary programmer support for a good-sized
regional bank's Collections Department, so I happen to know some of
these answers.

1) Banks will write-off a loan when it is determined that chances of
any further collection success are slim and none. Every bank has its
own policies about how this determination is made. At the bank where I
worked, this decision was made for each loan on a case-by-case basis
by the VP of Collections.

The applicable Michigan statute is 487.14205, Allowance for bank loan
and lease losses; charge off of debt, Sec. 4205.
"Unless a debt is well secured and in process of collection or the
debt constitutes a claim against a solvent estate in probate, a debt
due to a bank on which interest is past due and unpaid for a period of
6 months shall be charged off to the allowance for loan and lease
losses of the bank.
History: 1999, Act 276, Eff. Mar. 1, 2000"
As you can see, as long as the bank can legitimately say all hope on
collecting on the debt is not yet lost, they do not have to charge it
off.
http://www.michiganlegislature.org/mileg.asp?page=getObject&objName=mcl-487-14205&highlight=

2) Banks will almost always be willing to let the debtor of a
written-off loss make financial reparations for the amount they owed.
HOWEVER, it is very unlikely that, even once the total amount owed is
repaid, they will be willing to erase the incidence of default from
the debtor's credit report (although it's not going to hurt to ask
them nicely if they would do so).

The most the debtor can probably hope for is a letter from the
creditor that states that while the debtor defaulted on the loan, they
have since paid the full amount due. Getting this letter is very
important because, it can be used to force the credit reporting
bureaus to add a notation in their records that the default was
eventually paid off. While it doesn't erase the default from the
debtor's credit report, the payback DOES indicate a higher likelihood
to a potential future creditor that the debtor is a better credit risk
than someone who defaults and then never makes good on their default.

I hope this information has been of assistance to you.

Dear Geor, 

One of the other consequences of the bank's writing off the
debt is that they now issue 1099-CODs (Cancellation of Debt).

IRS will look for that to be reported as income on your
personal tax return. (It goes on the 'other income' line.)

So, unless, you are insolvent in the year the bank writes off
the note, you'll be paying taxes on that phantom income. 

Sorry.

Your TaxMama-ga

Taxmama, You Rock!!! I did not know that. Thanks!!!