Charge-Offs

The term "charge-off" is used by accountants. It means that a certain consumer's debt must be written off because he or she will not likely pay. It's a way of helping them balance the books and report an honest representation of the assets that creditor owns. In other words, a creditor can count what is owed him as an asset only as long as he can expect payment. If no payment is likely, it must be removed from that category. In which case, that amount is then a charge-off. This doesn't mean that the creditor will not continue to pursue collection, on the contrary, most will. It just means that for the purpose of fiscal reporting, it must be removed from the accounts receivable.

Charge-off accounts are reported to the credit bureau by just adding the number nine to the code for the type of account. No reason is reflected for the account being charged-off, unless the debtor submits a brief explanation. Instead, the credit bureau will write up a short comment about the consumer not meeting payment. This means that anyone who views the credit history of that consumer will likely regard the charge-off to mean that the consumer failed to meet their debts and that the account is considered uncollectable. This leads to a very nasty impression of a person's credit history.

Most companies vary as to the number of days that an account may be delinquent before it's considered a charge off. Generally, the limit is around 180 days past due but some will never consider an account a charge-off as long as they receive some type of payment from time to time. Some accounts will charge off after being past due only 90 days.

Some state regulate when a creditor may consider an account as a charge off and certain types of secured accounts (such as real estate) follow their own guidelines when it comes to when a creditor may consider the account a charge-off. However, in most cases, it's the creditor themselves who set the timeframe.

The horrible black mark of a charge-off cannot generally be removed and, unfortunately, charge-offs are the primary reason for being denied credit. Not only that but the consumer is still obligated to make payment for this account. Once paid-in-full, the account can be reported to the bureaus as a "paid profit and loss" account with a zero balance. The charge-off status even keeps the consumer from qualifying for a re-aging process (the act of bringing the account to current and forgiving past due payments - often done as part of a repayment plan) on the account. Also, before a consumer can purchase a home or refinance a current mortgage "charge-offs" often have to be paid-in-full. 

Charge-offs, like most other credit blemishes, are removed after seven years from the date the charge-off occurred. It's also possible to "settle-in-full" instead of paying-in-full. What this means is that you and your creditor reach an agreement in which a lump sum of less than the actual debt amount will be accepted as full payment but this does usually require a large amount of cash. Another way is to talk with your creditor about setting up a payment plan, many creditors will agree to stop interest fees (and other charges) once some sort of payment has been arranged. This can help your work to pay the account off quicker. If you enroll in a credit counseling program, some creditors may even remove the charge-off status once the account is paid through the agency's program.

With revolving accounts (which most MasterCard, Visa, and other financial services have) it's easier to avoid a "charge-off". With these accounts, if a consumer misses payment and gets close to charge-off, then enrolls in a credit counseling program their accounts can be brought back up to current, providing that all other payments are made on time. Check with your creditor about this, though, as not all companies are the same. Even some MasterCard and Visas do not offer plans or programs that can help a cardholder bring past due accounts current or to stop late fees.

If you have a fixed payment account that you are past due on and are offered lower monthly payments to help you out - you should be very careful. Sometimes this can trigger a "charge-off", as the account will become further behind. You should resume making the regular payments as soon as you can to avoid this or even consider paying extra when you can to help catch up on past-due payments.

A better alternative to simply lowering the payments may be requesting that the creditor rewrite the loan for the balance owed (including past due amounts) with the extended terms to lower the payments. This way, the past due account will be paid-off and a new loan will begin. This new loan can actually help improve your credit, as it will have a new history that will hopefully grow into a good report. If the creditor won't lower the payments, maybe they will still consider re-writing the loan with the same payments. The lender can then take the new loan to pay of the old balance, which will at least give you a fresh start. 

Accounts in which payment-in-full is due within 30 days offer very little options. Some of these accounts will simply charge-off if not paid within a reasonable time frame. Fortunately, some will work out a payment arrangement but it's strictly up to the creditor.

No matter what, consumers should do whatever they can to avoid a "charge-off" but if it does happen, remember that you are still responsible for the bill and that you should still work to get it taken care of. Once that's done, just keep in mind that bad credit is removed from your credit report after a specific period of time (in this case after 7 years).