A charge-off is an internal accounting term that lenders use to describe loan accounts they consider noncollectable. Credit card companies usually take the action after accounts are about six months behind, but other lenders may act earlier. After charge-off, lenders may agree to sell charge-offs to debt collectors. Some debt collectors purchase charge-offs in a bundle for cents on the dollar. After purchasing a charge-off, the debt collector can seek payment in full from the debtor.
Considerations
Original creditors will not negotiate with the debtor after a debt collector purchases a charge-off. The original creditor takes a tax write-off after selling the debt and no longer can discuss the debt except to provide the debtor with contact information for the new debt collector. In some instances, charge-offs lie dormant with the original creditor for months or even years before a debt collector purchases them.
Notice
A debt collector purchasing a charge-off must send a written notice to the debtor indicating the change in status. The debt collector may refer to the purchase of the charge-off in the letter and will ask for full payment immediately. However, the Fair Debt Collections Practices Act, a federal law, allows debtors to challenge the debt collector's legal right to collect on a specific debt. The law allows debtors to request that the debt collector show legal proof of the right to collect on a specific debt such as a charge-off. A debt collector can provide legal proof by sending the debtor documentation, such as the original loan application or the most recent statement. The debtor must request this documentation by sending a letter to the debt collector. Federal law requires the debt collector to suspend collection efforts on the charge-off until providing proof of the debt. The debtor must request the information within 30 days of receiving the first written notice from the debt collector.
Challenges
Some debt collectors are unable to verify that charged-off debts are valid because records are sometimes lost or misplaced as creditors sell the accounts, which does not end the debtor's legal responsibility for the debt, but it can make collection difficult for the debt collector. Without valid proof of the debt, the debt collector may not have information needed to win a lawsuit, which is the debt collector's most powerful weapon.
Solutions
Debtors sometimes can resolve charged-off accounts by negotiating settlement agreements. A settlement allows the debtor to pay less than the full amount of the charge-off. The exact amount depends on how well the debtor negotiates and how much the debt collector is willing to accept. Paying a charge-off may have minimal effect on credit score, however. Debtors risk incurring significant harm to their scores when they begin missing payments, leading to the charge-off. Paying the charge-off does not erase that damage, but it does end the debt. Credit bureaus update credit reports to show a charge-off as a paid charge-off after the debtor makes payment.
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