The term "charge off" became prominent in the news after the economy started falling in the late 2000s. Banks or lenders initiate charge off accounts when they realize a debt will likely not be paid.
Accounting
A lender's accounts receivable department will determine if a loan or charge has become a bad debt. After this determination, they will take one of two steps. They will either write off the debt on their books as an expense on their income statement or sell the debt to an outside collector.
When Charge Offs Happen
Normally a lender will not initiate a charge off account until there has been no payment on the debt for 180 days. If a borrower files bankruptcy, the charge off is usually immediate.
You're Still Liable
A charge off doesn't erase your debt--it just means the company has written off the amount of the debt on their income reports. Any contract that you signed saying you would be responsible for payment of the debt is still in effect. Even though the lender has filed a charge off, it may still take action to collect.
Selling the Debt
A lender or credit company can decide to sell charged off accounts to a collection agency. The agency then has every right to collect on the debt that the original lender had. Because a collection agency's profit comes solely from collecting debt, it may be more aggressive in trying to collect than the original lender was.
Your Credit Report
A charge off has a serious negative effect on your credit rating. Even if you ultimately pay off the debt, it will be recorded on your report. A charge off may remain on your credit report for seven years or more, unless you are able to strike a deal with the lender when you pay off the debt. When full payment is made, be sure that it shows on your report as a "paid charge off" or "paid as agreed."
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