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Credit Repair: What Is A Charge Off?

Credit Repair: What Is A Charge Off?

A charge off is a term used by credit issuers to specify that an outstanding account balance is being written off as a loss. Charge-off credit balances normally occur after an account has become past-due by 180 days or approximately six months. It is important to understand that a charge-off is a technical term for accounting purposes which allows the credit issuer to take a loss on outstanding balances but it does not make the obligation disappear.

When a card holder's account has been charged-off by a credit issuer it allows them to apply their loss to their adjusted gross corporate income to lower their tax burden. Unfortunately for consumers who have charge-off accounts they do not get the same benefit. In fact charge-off accounts can be one of the worst black marks on a credit report and it shows a card holder assumed a significant amount of debt and then was either unwilling or unable to repay the financial obligation. A charge-off can significantly impact your credit score and detrimentally affect your ability to secure additional credit in the future such as an auto loan or mortgage.

Although the status of the account has been changed from past due or delinquent to charge-off it does not mitigate the financial responsibility for repaying the loan. While the lending institution will claim it is a loss the balance will still appear on all three credit reports from the national credit reporting agencies. The outstanding debt will still need to be addressed as it will appear on your credit reports for up to seven years unless the balance is resolved. While the issuing financial institution may have moved on so has the debt in terms of collection.

When an outstanding credit balance has become a charge-off there are normally only three options to resolving the debt. One way to resolve the outstanding debt is to contact the lending institution and verify they still own the account. This is important because you don't want to send in a check to the existing credit issuer if they sold the account to a third party collection agency. If they do own the account offer to settle the outstanding balance for some percentage such as 40% to 60%. Keep in mind they have no obligation to settle the account for less than what they're legally owed but sometimes lenders will take a partial settlement as some money is better than zero and it allow both the credit holder and credit issuer to move on in an amicable manner. Write down everything because you don't want to cut a check for thousands of dollars and then have the balance still appear on your credit report as being a charge-off.

Many credit issuers have no incentive to deal with accounts that have a charge-off status and will frequently sell these accounts to third-party collection agencies. Once third party collection agencies purchase charge-off accounts the balances are then collected upon as if they were the original credit issuer. This sale will also be displayed on all credit reports as having been sold to third-party collections so even if the balance is resolved it is still worse than a partial balance settlement with the original credit lender.

If the original lender has no interest in settling the outstanding balance for a partial payment and also is unwilling to sell the account to a third party collection agency they are still left with the option of suing for the outstanding balance. Companies with charge-off accounts will sometimes sue the account holder seeking legal judgment resulting in forfeiture of assets or garnishment of wages. Legal judgments also appear on credit reports and might possibly be the worst thing that can happen regarding credit report black marks. What this tells prospective lenders is that at the end of the day resolving a financial obligation went so awry that the only appropriate course of action a credit lender had was to sue a former customer. That says a lot about how the situation was handled by the account holder and will virtually guarantee no one will lend you money in the future.

Obviously if a charge-off account can be resolved prior to it being sold to a third party collection agency or run through the legal system then it is better to do so. Even in the most dire circumstances there are options available and knowing which choices you have and what the repercussions are will go a long way to helping you make an informed decision. When dealing with any financial institution document everything thoroughly and be as informed as possible to protect yourself. Once a charge account has been resolved to both parties satisfaction verify the new account status on your credit reports as this will impact financial and employment situations going forward.