Understanding Charge-Offs

Charge-Offs: A definition

“Charge-off” is an accounting term used when a creditor removes from their list of assets the amount they expect to receive from a debtor. For accounting purposes, the debt is considered uncollectible. But most creditors will still make attempts to collect the debt, or turn it over to a collection agency. These attempts often continue for years.

Charge-offs hurt your credit

Charge-offs damage a credit reports. It is generally impossible to get real-estate financing (purchase a home) until charge-off accounts are paid-in-full, or settled-in-full. Even then, the fact that the account was charged-off in the first place can make it more difficult to obtain credit. This fact stays on the credit report for seven years.

Charge-offs go to collection agencies

When a creditor charges-off a debt, they will often assign it to a collection agency. Collection agencies usually put more pressure on debtors to pay a debt. Just having a collection agency involved puts more bad marks on a credit report. And they are harder to negotiate better terms with than the original creditor in most cases.

What to do to avoid charge-offs

In a lot of situations, beginning to make regular payments is enough for creditors to report a debt as current or past-due rather than writing it off.
Many credit cards issued by banks will be brought current if the debtor enrolls in a credit counseling program and resume making regular payments.
Debtors can ask creditors to draw up a new loan for the amount owed with lower payments. Sometimes they may be willing to lower the interest rate as well.

A few good things come with having a debt charged-off.

If you can manage to pay a lump sum, creditors will be more willing to negotiate a settlement for less money after the debt has been charged-off, because they already expect that it may never be paid at all.
Most creditors will agree to stop charging interest and fees if payment arrangements can be made on charged-off debts.