I must get a client a week who asks me what a "charge off" means. I always say it's not a legal term, I assume it's some internal booking term, and, of course, the debt is still collectible and should be listed in the BK. Does anyone know any more about what it means? Thanks.

Answer:

It's an accounting term. One has an account receivable or any other kind of debt owed to it. It's treated as income when the bill goes out. Over time or by some other accounting standard, a judgment is made that the debt won't be paid, so a loss deduction is taken off of income.

This is the difference between cash accounting and accrual accounting. We in bankruptcy mostly get paid when or before we do the work, so it's not really important to us.

Consider Dewey, Cheatham and Howe which sends out a monthly statement to Enron for hourly work done in October of 2001. Dewey will report it as taxable income in October, because it likes to show income when the work is done and the money due. This is accrual accounting, and is more commonly accepted for large businesses than cash accounting which will report the income when the money comes in (or, if deposited into trust, when the money is paid out of trust to the law firm).

Enron goes bust in February of the following year. Dewey will take a loss deduction from its 2002 income for this unpaid account receivable.

Higher level stuff: The unpaid account receivable is treated as an asset on Dewey's balance sheet (of assets and liabilities; separate from an income statement) and over on the liability side will be a "loss reserve" for an estimated percentage of expected receivables that won't be paid. When the debt is written off, the asset disappears. 

But the debt is still collectable even after being written off, and that's often overlooked.

Jed Berliner, Springfield, MA