The Meaning of a Charge Off on Your Credit Report

Knowing what charge off means on your credit report may save you time when it comes to disputing debts and seeking new credit. Many times, it can also save you money by knowing about it ahead of time and arming yourself with proof that the debt is invalid, or disputing it and having it removed from your credit before your new lender may ever see it.

By definition, a credit charge off is really a term used in accounting when a business is writing off the account, for tax purposes, as an expense. When a consumer fails to make payment on a credit account for a period usually around six months, the creditor lists it as a charge off for accounting purposes.

The unspoken law in the wide world of credit is that if a consumer has not made a payment on an account in this time period, they will never pay the debt. This assumption makes the debt a loss, and not an asset.

For accounting and tax purposes, a credit company is required to file the consumer's credit line and amount as an asset to their business. Think of it in terms of your home. Your home is your asset because it is worth a specified amount of money.

To the credit supplier, credit accounts are worth the exact amount of money you owe on the debt. After the specified time period, usually around six months, the credit company can file the account as a bad debt, write it off, and claim it as a loss and not as an asset.

Even after a debt is charged off, and appearing as so on your credit report, you are still responsible for the balance of that debt. The biggest reason that a credit company will update a credit account on a credit report with the charged off flag is because it makes it easy to update your payment history.

With this notation on the consumer's credit report, they company will not have to update the account every single month. Without the flag, they are obligated to update the credit report monthly with the credit bureaus. The notation is the easiest and fastest way of saying that the account holder has not made a payment in a long time.

After the account is charged off, the creditor is very likely to continue collection efforts. Most creditors will either send or sell the debt to a third party collection agency to take over the collection efforts on their behalf.

This does sound very bad, but it could be the break you needed. When a credit account is sent to a debt collector, this is most often the time when you will be offered a settlement on the account.

A settlement is a one time, lump sum, partial payment. It could range anywhere from 50% - 80% of the total debt amount. After being offered a settlement, and making the payment, your credit report will be updated as settled in full with the amount of the settlement, original amount of the debt, and the flag showing the account as charged off is then removed.

Many states have varying laws regulating when a credit agency or bank can consider the account as charged off. Some states may allow companies headquartered in their jurisdiction to write the debt off in only 90 days.

Most of the time, the time period will not exceed six months. If you make any type of payment on the account, even one that is substantially less than the amount due or total balance, the creditor will not be able to list the debt as a write off. In addition, they will not be able to update your credit report with a charged off flag.

sources:

http://www.yourcreditsource.org/credit_tips/charge_offs.html

http://www.bankrate.com/brm/news/debt/20021216a.asp

http://www.bankrate.com/brm/news/DrDon/20021217a.asp