CHARGE-OFF

what is a charge off

What is a Charge-off?

Also known as a Profit and Loss Write-off, a charge-off or chargeoff is the declaration by a creditor that a debt is unlikely to be collected.

This occurs when a consumer becomes severely delinquent on the debt.

Traditionally, creditors will charge-off an account after six months (180 days) without payment.

In the United States, Federal regulations under the Uniform Commercial Code (UCC) require creditors to charge-off installment loans after 4 months (120 days) of delinquency, while revolving credit accounts (credit cards) must be charged-off after 6 months (180 days).

What is the purpose of a Charge-off?

The purpose of charging off an account is to give the creditor a tax exemption on the debt.

The creditor will write the debt off its’ books as a loss.

The charge-off, though, does not free the debtor of having to pay the debt. The creditor may still continue perusing the charged-off debt themselves or sell the debt to a collection agency.

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Am I Still Liable for a Debt After it is Charged off?

Yes.

While a charge-off is considered “written off as uncollectable” by the creditor, the debt is still legally valid.

The creditor has the right to collect the full amount of the debt, plus interest and fees, for a time period permitted by the laws of the state in which the consumer resides.

Every state has a different statute of limitations for different types of debt. The statute of limitations sets the maximum amount of time a creditor has with which legal proceedings may be initiated to recover the debt owed.

To see if you are still liable for a charged off account, check your state’s Statute of Limitation of your type of debt.

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How does a Charge-off Impact my Credit?

A charge-off is one of the most adverse factors that can be listed on a credit report.

Once charged-off, the account’s status will be changed to “Charge-off” and the account’s payment history will have a “Charged-off” notation added to it.

The account trade-line will include relevant all dates as well as the amount of the charged-off debt reported in the balance section.

A charged off account can lower your FICO score by 100 points or more.

What Can a Company Do To Collect on a Charged-off account?

Creditors may attempt to collect on their debt internally themselves or by farming out the work to outside collection agencies.

If the amount of the debt is large, there is the possibility that the creditor or collection agency may initiate a lawsuit to get a judgment against the borrower in order to recover their funds.

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What to Do After a Charge-off?

A charge-off reporting on your credit reports is going to cause substantial negative issues to your credit scores.

Your first reflex may be to settle the debt for less than the full balance and that may be a good place to start.

But.

Paying off a charged-off account could actually lower your credit scores. As previously stated, the last 6 months of payment history impact your credit scores more than anything, Paying off a charged-off account that hasn’t reported activity in a few years will lower the balance to $0 (which is a good thing) and change the status from Charged-off to Settled/Paid (another good thing) but, the account will re-report new activity which may lower your credit scores for the short term.

This is also why disputing a charged-off account may actually cause more bad than good.

Sometimes a direct creditor intervention or a document request accomplishes everything a dispute does, if not more, without any negative side-effects.

The way that you should address a charge-off will depend on what your short and long terms goals are and the activity that the account is reporting.

On top of everything, if the debt is past the statute of limitations, settling the debt may be a waste of money.

You should also try to be proactive and work on the charged-off account but, it’s important to work smart and prioritize your actions based on your goals.

CreditFirm.net has helped thousands of clients improve their credit scores and remove charged-off accounts from their credit reports.

If you have a charge-off on your credit reports contact CreditFirm.net to find out how we can help fix your credit and improve your credit scores.

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