How it relates to consumers and their credit reports
—and steps to prevent it.
—Article by Daniel Gelinas
The following is provided as general information to better understand the term “charge-off” and the potential consequences such status has on credit bureau reports. This article also offers various alternatives to prevent a potential “charge-off” and other derogatory reporting. No information stated herein is intended to be construed as legal advice and is solely the opinion of the author.
“Charge-off” is primarily an accounting term used when a creditor eliminates a receivable (the balance due on an account) from the creditor's assets. It is sometimes referred to as a “non-performing asset' or a “write-off.” An account said to be “charged-off” is considered uncollectable by the creditor for the purpose of fiscal reports. However, most creditors will continue to pursue collection of the debt, or may sell or assign the account to a collection agency. In practice, therefore, most creditors, or their assignees, do not consider the debt uncollectable until the debt has aged considerably; in some cases, collection activity may span a decade or more.
Charged-off accounts are generally reported to the credit bureaus as an “I9” (Installment Loan #9) or “R9” (Revolving Account #9). The number 9 is the code for “charge-off.” Credit bureau reports do not reflect the reason for an account being charged-off, for example, whether caused through negligence or misfortune; unless the debtor himself or herself has submitted a brief explanation. The following is a typical annotation on a credit report which has been charged-off. Note, however, that each credit bureaus varies in their terminology.
“This account was opened (date) and had revolving repayment terms. You have contractual responsibility for this account and are primarily responsible for its payment. The high balance of this account is (amount). The charge-off amount of this account is (amount). As of (date) this account is seriously past due and written off as uncollectable. Your balance as of (date) is (amount). The last payment reported to (name of reporting credit bureau) was made on (date).”
In short, the credit industry generally regard charge-offs as meaning the debtor failed to meet the terms of the contractual agreement, or subsequent modified terms or offers of settlement, and the account has reached a point beyond the tolerance of the creditor.
Creditors vary widely in the number of days they allow an account to become delinquent before it charges off. Generally, an account will charge-off once it reaches 180 days past due, while some creditors allow 210 days. A few creditors will never consider an account as charged-off providing they are receiving some level of payment periodically. Accounts due-in-full within 30 days of statement receipt will sometimes charge-off after a mere 90 days past due.
Some states may regulate how and when a creditor may consider an account as charged-off. Also, certain types of secured accounts and real estate debts may need to follow certain guidelines before the creditor may consider the account as charged-off. In short, however, the charge-off period for most unsecured debts and financial obligations is arbitrarily set and controlled by the creditor.
The Bad News
Once an account is charged-off, it generally cannot be reversed and is considered very derogatory with regards to a credit report. Charge-offs are often cited as a primary reason for being denied credit. The fact that the account has been charged off does not remove the obligation of the debt; in fact, the debt is now considered “due-in-full” due to breach of contract. The account may be sent to the creditor's internal charge-off department for collection, to a third party collection agency, to an attorney for litigation, or sold to another party. Once a charge-off occurs, continued monthly payments (monthly activity) typically do not get reported to credit bureaus until the account is paid off. Once paid-in-full, the account is typically reported as a “paid profit and loss” account with a zero balance.
Because of the charge-off status, should the consumer enter into an agreement for repayment of the debt, the account does not qualify for re-age (the act of the creditor bringing the account current and forgiving/deferring past due payments). This is true even though the creditor may normally provide a re-aging program to cure past due accounts for performing accounts (accounts not charged-off).
Unpaid charge-off accounts typically need to be “paid-in-full” or “settled-in-full” should one wish to purchase a home or refinance a current mortgage; in essence, they will almost always need to be resolved one way or another when financing real estate. A “settlement-in-full” is an alternative to resolving a charge-off. This is a negotiated lump sum payment for less than the full balance; the creditor accepting such payment as payment-in-full. The problem confronting most debtors is that settlements typically require “cash” with no or little consideration for extended monthly payments. Unfortunately, most consumers do not have the means to pay the account in full. This is where borrowing from a relative or friend might come in handy.
Even though both the debtor and the creditor considers the account “paid-in-full,” it is often reported to the credit bureaus as “settled-in-full” or “settled for less than full balance.” Paying in full or settling the account is only one aspect of your credit report. Just the fact that the credit report shows an account as “charged-off,” whether paid or not, may still pose a problem when attempting to acquire credit. In addition, there are pros and cons with regards to settlements which should be taken into consideration.
The Good News
The account will qualify to be removed from the credit report after seven years from the date the charge-off occurred; or possibly the date of last activity. In addition, creditors are more likely to accept a settlement-in-full offer to clear the account off their books; although settlements typically require ready cash.
While a creditor may have the legal right to continue to assess interest and other fees, most creditors will agree to stop interest if a payment arrangement can be made to liquidate the debt. If you have enrolled in a credit counseling program, some creditors may remove the charge-off status once the account is paid as agreed through the agency's program.
Most creditors have programs in place for “revolving” accounts to prevent the account from charging-off when placed with a nonprofit consumer credit counseling agency. Mastercard, Visa and most retail finance accounts are revolving accounts. Once enrolled in a credit counseling program, whether an account is slightly past due or very delinquent (close to charge-off), the account is commonly brought current within 60 to 120 days of the consumer's first payment though the agency. Once brought current, providing all subsequent payments are made in a timely manner, these types of accounts are often reported as “current” and the threat of “charge-off” is avoided.
Not all Mastercard and Visa accounts are created equal. While most major banks have some level of forbearance and debt relief, policies vary widely among creditors. For example, it is our experience that, for some obscure reason, many member-owned “credit unions” offer no plan or program for their card holders to bring past due accounts current and to stop late fees. This seems contrary to what one might expect considering that a credit union is usually a non-profit member-supported organization operated for the benefit of their members. Nevertheless, most have limited forbearance policies. This position is also shared by a “minority” of creditors in all areas of finance, although it seems most prevalent with credit unions.
In any event, accounts with these types of creditors may show as “past due” during the entire liquidation of the debt unless the past due amount is paid. Being past due, these accounts potentially may charge-off, although consistent monthly payments most often will prevent this. These accounts may, however, show as “over 120 past due.” This is the highest level of delinquency generally reported to the credit bureau, short of the term “charge-off” or bankruptcy.
Some creditors that do not re-age accounts stop reporting the “history” of an account while enrolled in a credit counseling program, thereby providing some means of assisting the consumer. While “current status” reporting is best, the next best would be the creditor not reporting derogatory information to the credit bureau and keep it to themselves. There are many creditors that take this position. This type of creditor will often report the account as “current” once paid as agreed on a repayment plan. To do so, however, is a gift. Lastly, there are those creditors that simply don't care and will allow an account to report at the highest level of delinquency. Therefore, consumers should always monitor their statements, whether enrolled in a credit counseling program or if they are on a workout plan directly with a creditor.
The previous information pertains primarily to revolving accounts. Unfortunately, many creditors do not have systems in place to easily resolve past due payments or modifications in payments for personal loans, fixed monthly payment accounts, secured accounts, lines of credit and most 30 day due-in-full type accounts.
With regards to personal loans or other fixed payment accounts, while a creditor may agree to a lower fixed monthly payment, the difference between the agreed-to lower payment and the original payment may cause the account to become further past due and may in time cause the account to “charge-off.” If this is the case, while the account is considered a “past due” account and may be approaching the charge-off stage, it is often possible to prevent the charge-off by starting to make the normal monthly payment. This holds the account from going further past due. Once the normal payment is being paid regularly, even though the account may remain past due, regular monthly payments may prevent further delinquency and prevent charge-off. Even better, would be to pay the normal monthly payment plus a little more in order to begin to catch up the past due payments. If a larger than normal payment is made, it may eventually catch up the past due amount and eventually cause the account to become current.
If you have one of these types of loans, another alternative is to request that the creditor rewrite the loan for the balance owed including all past due amounts with extended terms to accommodate a lower payment. You should also request that the rewritten loan be at a reduced interest rate—it doesn't hurt to ask. In any case, once re-written, the past due account will be paid-off and the new loan will begin a new reporting history.
If the creditor will not agree to lower payments, they may consider at least rewriting a new loan with payments equal to the old loan. The lender would then take the new loan proceeds and pay off the old loan balance. This may not help in lowering your payment, but it will provide you with a fresh start, with the account reflecting a current status. These options are not always available with all creditors but should be taken into consideration and presented to the creditor (they won't always offer) when trying to get your credit in order or you simply wish to return your account and creditor relationship to a “good” standing.
Unfortunately, 30 day type accounts do not offer many resolutions. Because the account was suppose to be paid in 30 days or so, consumers are at the mercy of the creditors. Some will simply allow the account to charge-off if not paid-in-full within a reasonable time, while others will work with a payment arrangement with no derogatory reporting at all. Simply put, it's all up to the creditor. Once again, many 30 day creditors will offer some level of help to consumers that are enrolled in a credit counseling program. For example, under a payment arrangement through credit counseling, even these types of creditors typically do not pursue collection activity directly against the consumer, providing the “agreed-to” payment is met.
By policy, a few creditors will send the account out to a collection agency. This seldom creates a problem, however, as the collection agency will usually accept the payments through the agency with no further recourse. If you are trying to handle an account on you own, however, you should do everything possible to prevent it from going to a collection agency. That is a whole other issue and this article is not meant to cover the consequences and how to handle such matters. Simply put, it is usually easier to negotiate with the original creditor. Avoid having an account turned over to a collection agency at all cost.
In short, it is these types of accounts as opposed to “revolving accounts” that present the biggest challenge to consumers with regards to credit reporting and modified payment arrangements. One must simply do the very best within their capacity to resolve these types of accounts.
Whether in a credit counseling program or not, one must first give careful consideration to their priorities so they may take the best course of action given their particular circumstances. While it is always advisable to do whatever is reasonably feasible to avoid the so called “charge-off,” it is not the end of the world. As has been said before, “this too shall pass.”