What Does a Charge-Off of Credit Card Debt Mean?
A charge-off is not what it seems. Many people mistakenly believe it means the account has been forgiven and they are no longer on the hook for the credit card debt. In fact, it means quite the opposite.
The term charge-off is an accounting term that banks use. They are required by accounting principles to accurately reflect the accounts receivable on their books. If an account is seriously delinquent, it should not be treated the same as somebody who is only one month late and has a higher likelihood of catching up.
When Does a Charge-Off Happen?
For this reason, most charge-offs will occur 180 days or six months after default. The credit card company or bank will of course call you and send you letters trying to collect during this time period. But if they haven’t gotten payment from you for about 6 moths, they will issue a charge-off. This will be reflected on your credit report. Practically speaking, this means the bank doesn’t believe your account is going to be brought current – at least voluntarily.
Is There a Difference Between Charge-Off and Written Off?
Many times, credit reports will say written off instead of charge-off, or both. Essentially, it means the same thing. The bank is saying that they have written down the value of that account. Both terms are used interchangeably in the industry.
What Happens After a Charge-Off?
After a charge-off of your credit card account or other loan, one of three things will happen.
First, the bank may choose to do nothing. They may simply sit on the account and let it age, hoping your finances improve and they can pursue you later. Of course, they will have to keep in mind the statute of limitations and will need to take action before that expires.
Second, the bank may sue you immediately. Some credit unions and certain banks can be very aggressive and proactive in suing after charge-off. And it may depend on what they know about you and your assets. But many banks won’t take action right away and will opt for a different path.
Third, the bank may sell the debt to a third party debt buyer, sometimes called a junk debt buyer. These debt buyers buy old charged-off credit card accounts in bulk and usually pay only pennies on the dollar. The debt buyer may then do anyone of the above three things. They may sit on it and let it age. They may sue you immediately. Or they might even sell it to another debt buyer.
As you can see, a charge-off of credit card debt does not mean the issue is done. If you have a charge-off on your credit report or are about to, please contact our firm for a free consultation to develop a proactive strategy in dealing with your debt.