Charge-off
Encyclopedia
A charge-off or chargeoff is the declaration by a creditor (usually a credit card
account) that an amount of debt is unlikely to be collected. This occurs when a consumer becomes severely delinquent on a debt. Traditionally, creditors will make this declaration at the point of six months without payment. In the United States, Federal regulations require creditors to charge-off installment loan
s after 120 days of delinquency, while revolving credit
accounts must be charged-off after 180 days.
The purpose of making such a declaration is to give the bank a tax exemption
on the debt. Bad debts and even fraud are simply part of the cost of doing business. The charge-off, though, does not free the debtor of having to pay the debt.
A charge-off is one of the most adverse factors that can be listed on a credit report. It will then be listed as such on the debtor's credit bureau reports (Equifax
, for instance, lists "R9" in the "status" column to denote a charge-off.) The item will include relevant dates, and the amount of the bad debt.
While a charge-off is considered to be "written off as uncollectable" by the bank, the debt is still legally valid, and remains as such after the fact. The creditor legally has the right to collect the full amount for a time periods permitted the laws of places of the location of the bank and where the consumer resides. Depending on the location, this amount of time may be a certain number of years (e.g. 3 to 7 years), or in some places, indefinitely. Methods of collection that can be used include contacts from internal collections staff, outside collection agencies
, or if the amount is large (generally over $1500–$2000), there is the possibility of a lawsuit or arbitration
.
In the US, as the charge off number climbs or becomes erratic, officials from the Federal Reserve take a close look at the finances of the bank and may impose various operating strictures on the bank, and in the most extreme cases, may close the bank entirely.
If the charge-off has been paid in full, it will be listed on the credit report as "paid in full." If settled for less than the amount, it'll be listed as "settled." Even such a listing on a credit report can be negative..
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
account) that an amount of debt is unlikely to be collected. This occurs when a consumer becomes severely delinquent on a debt. Traditionally, creditors will make this declaration at the point of six months without payment. In the United States, Federal regulations require creditors to charge-off installment loan
Installment loan
An installment loan is a loan that is repaid over time with a set number of scheduled payments. The term of loan may be as little as a few months and as long as 30 years...
s after 120 days of delinquency, while revolving credit
Revolving credit
Revolving credit is a type of credit that does not have a fixed number of payments, in contrast to installment credit. Examples of revolving credits used by consumers include credit cards. Corporate revolving credit facilities are typically used to provide liquidity for a company's day-to-day...
accounts must be charged-off after 180 days.
The purpose of making such a declaration is to give the bank a tax exemption
Tax exemption
Various tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Tax exemption may also refer to a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income under some...
on the debt. Bad debts and even fraud are simply part of the cost of doing business. The charge-off, though, does not free the debtor of having to pay the debt.
A charge-off is one of the most adverse factors that can be listed on a credit report. It will then be listed as such on the debtor's credit bureau reports (Equifax
Equifax
Equifax Inc. is a consumer credit reporting agency in the United States, considered one of the three largest American credit agencies along with Experian and TransUnion. Founded in 1899, Equifax is the oldest of the three agencies and gathers and maintains information on over 400 million credit...
, for instance, lists "R9" in the "status" column to denote a charge-off.) The item will include relevant dates, and the amount of the bad debt.
While a charge-off is considered to be "written off as uncollectable" by the bank, the debt is still legally valid, and remains as such after the fact. The creditor legally has the right to collect the full amount for a time periods permitted the laws of places of the location of the bank and where the consumer resides. Depending on the location, this amount of time may be a certain number of years (e.g. 3 to 7 years), or in some places, indefinitely. Methods of collection that can be used include contacts from internal collections staff, outside collection agencies
Collection agency
A collection agency is a business that pursues payments of debts owed by individuals or businesses. Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed....
, or if the amount is large (generally over $1500–$2000), there is the possibility of a lawsuit or arbitration
Arbitration
Arbitration, a form of alternative dispute resolution , is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons , by whose decision they agree to be bound...
.
In the US, as the charge off number climbs or becomes erratic, officials from the Federal Reserve take a close look at the finances of the bank and may impose various operating strictures on the bank, and in the most extreme cases, may close the bank entirely.
Effects on credit report
With a chargeoff being one of the worst possible items on a credit report, this may make obtaining any unsecured or even secured credit more difficult.If the charge-off has been paid in full, it will be listed on the credit report as "paid in full." If settled for less than the amount, it'll be listed as "settled." Even such a listing on a credit report can be negative..
External links
- What is a charge-off?
- Charge-offs in the United States -- history since 1985, by the FedFEDThe Fed is the informal name of the Federal Reserve System, the central bank of the United States.Fed or FED may also refer to:...