Charge-Offs – What Do They Mean?

What is a charge-off?

A “charge-off” is a balance owed that has been deemed a “loss” for accounting purposes in the creditor’s financial statements.

Consumers.

For consumer debt, government regulations REQUIRE a charge-off on an account after a specific period of delinquency. This is to keep the records of financial institutions realistic and healthy.

Let’s say if a credit card company claims it has a million dollars in business on its books. Their financial standing changes substantially if three-hundred thousand of that million is UNCOLLECTABLE.

Statistically, the longer a account is unpaid the less likely a recovery becomes. So, government regulations require a delinquent consumer credit account to be a charge off, loss, etc., after a certain amount of time.

Impact.

Obviously, a charge-off looks bad on your credit report. Your credit rating can be severely impacted by one. This is especially true for newer credit histories.

A charge-off stays on your credit report for up to 7 years. However, the effect on your credit score fades over time. Sometimes, it can be removed through various dispute/verification and other processes.

Do You Still Owe On A Charge-Off?

Generally, yes. The balance is still due and subject to collection attempts. This can be by the original creditor and/or a collection agency. A charge-off does not retire the debt. It simply is changed on the books of the creditor.

How can a charge-off be sold, if it’s worthless?

A charge-off is like a discounted asset. It is like an old piece of equipment that’s 7 years old. On the books, it may be worthless. Yet, it might still have significant value. If the creditor can find a buyer for that charge-off by collecting on it themselves or selling it to a debt buyer, they may do that.

Can a charge-off still have interest charges?

Yes, if the credit agreement allows it. If so, it’s usually at their default rate. But, if there’s a conflict with state law, they cannot. This only applies to the original creditor, not to a debt buyer.

A debt purchaser (JDB) may not have the legal right to charge interest on a charge-off. When facing a junk debt buyer demanding interest on an alleged debt, tell them to send you competent evidence of their legal right to do so. Ask for proof that the amount they claim has been determined in accordance with applicable state and federal laws. This is part of the debt validation (DV) process and they must provide evidence supporting their claim, on your request.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.