A charge-off and a judgment are completely separate concepts; one is an accounting function with the ability to negatively impact a consumer's credit score and the other is a powerful legal instrument with negative effects that reach beyond credit scores to personal property. When a bank charges off a credit account, it does not impact its ability to get a judgment on that account.
What is a Charge-Off?
A charge-off is an accounting entry that banks and other creditors are required to make when a credit account is in default. The accounting entry moves the outstanding balance from the assets category into the bad debt, or loss, category, meaning that the bank does not believe that it will collect what is owed on the account. Charged-off accounts also provide a tax write-off for the bank or creditor, but do not negate the borrower's repayment responsibility.
What is a Judgment?
A judgment is a court-ordered ruling that provides the bank, creditor or third-party collection agency with the legal means to force collection of a delinquent account. Even if the bank reports the account as a charge-off, it is within its legal rights to pursue a judgment. Many banks and original creditors sell charge-off accounts to debt buyers or debt collection agencies. If the original credit agreement, signed by the borrower, includes a clause stating that the borrower agrees to pay the bank or its assigns, then the third-party collector also has the right to pursue a judgment.
Impacts of a Charge-Off
Banks and original creditors often report charge-off accounts to all three credit bureaus. These accounts are negative listings on the borrower's credit report and can seriously impact the borrower's ability to qualify for credit cards, mortgages and other installment loans. Charge-off accounts that are sold to third-party collectors may also appear as separate 'collection' entries on a credit report, further impacting the borrower's credit score. These negative entries can legally remain on the credit report for up to seven years.
Impacts of a Judgment
Judgments are one of the most negative entries a consumer can have on a credit report. Judgments remain in effect and listed on the report for at least seven years, but may remain as long as 20 years. Each state determines the timeframe for judgments; some states allow judgments to be renewed. In addition to ruining a consumer's credit, judgments are legal instruments by which banks and third-party collectors enforce account collection. Many judgments are automatic real property liens, some states require additional legal maneuvering before a judgment becomes a lien. In addition to property liens, judgments may give the bank or collector the power to levy bank accounts and seize personal property such as vehicles and household furnishings.
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