The term charge off describes an accounting function followed by your lenders. When speaking of revolving consumer credit card accounts, a charge off occurs when the credit issuer either chooses to, or must, recognize an unpaid loan balance as a loss.
Losses are bad news for lenders. The bad news gets reported and can affect anything from loan loss reserves, securitization, liquidity, even solvency.
Because of the bad news nature of a charge off, your credit card issuer will generally wait until the maximum time allowed to charge off your unpaid debt. The time frame for your creditor to recognize the loss on your unpaid credit card balance is outlined in Generally Accepted Accounting Principles (GAAP) and is typically 180 days of consecutive nonpayment, or what the Office of the Comptroller of the Currency (OCC) has designated as “seven zero billings”. There will be instances where charge off will seem to occur at 210 days of nonpayment.
Most lenders will wait as long as is allowable to take the charge off hit to their books, but they could choose to take the hit earlier than 180-210 days. It’s just not a common practice.
Charge Off Impacts Your Credit Report
The term charge off has been escalated from a simple accounting function to a designation you find on your credit reports relating to unpaid collection accounts. The charge off event now has an extra implication for lowering your credit scores (though months of missed payments leading to a charge off causes most the damage). And the charge off event now has an impact on when and how you go about negotiating settlements, or whether you can consolidate your bills with any meaningful impact.
While you are trying to navigate your inability to pay all of your debts, and when evaluating the different debt relief options available to you, understanding the timing and affects of your accounts charging off will give you a needed advantage in your planning and timing.
The period leading up to, during, and after a charge off of your unsecured debts will impact:
- Debt collection efforts with your original creditor
- Debt collection with an outside collection agency
- Debt buyers and subsequent collection efforts
- Debt Settlement/Debt Negotiation
- Credit Reporting
- Debt Management Plans
- Risks of being sued on unpaid debt
- Deciding to file bankruptcy
- Delaying a bankruptcy
Each one of the bullet items above is deserving of a separate article. I will be posting some consolidated information covering credit card charge off in coming months.
Planning Your Debt Settlement With A Charge Off
Your lenders, especially credit card banks, tend to be the most open to settling with you just before they charge off your account. Two huge benefits to settling a debt before charge off are:
- You can often prevent having to deal with external debt collectors.
- You can prevent being sued for collection.
You will need to be prepared to pay a pre-charge off credit card settlement in a lump sum, or over a 90 day period, as there is a federal OCC rule that prevents creditors from giving you more than 94 days to pay a settlement if they have not charged off the debt.
After charge off occurs there is typically more settlement and payment flexibility that comes from third party collectors, and sometimes the creditors themselves.
My experience working with people to build and implement their debt settlement plan is to be very selective with the accounts you settle before charge off, and the ones you settle afterward. That is because most of us do not have all the money available to settle all our debts within the first 6 months of being late.
If you have multiple accounts to settle, and you need more than six months to pay them, check out this helpful video about settling several accounts with payment terms.
If you would like to speak with a professional about what to do with debts not yet charged off, or that have already charged off, you can request a free consult with me.
If you have questions about anything covered above, and would like feedback without scheduling a call, post in the comment section below.
