A charge-off is an accounting function used by creditors, including banks and credit card issuers. It occurs when a card issuer recognizes that a borrower is in serious default and the unpaid balance on an overdue account should be considered a loss. At that time, the account is charged-off, meaning it is deleted from the creditor’s books.
Depending on a bank’s policy, and state and federal regulations, charge-offs must occur after 180 days of continuous non-payment, and after every effort has been made by the credit card lender to collect the owed debt.
Once an account is charged-off, a creditor can continue to try and collect through its own auspices, work with a third-party collection agency or hire an attorney to enforce collection while still owning the account. The creditor can also sell the account to a debt collector at a discount, who will then reinvigorate the attempts to collect the loan’s unpaid balance.
Charge-offs Hurt Your Credit Rating
Charge-offs can have serious and damaging effects on a borrower’s credit rating and credit score.
A charged-off account will be reported to the major credit rating bureaus and remain on your credit history for seven years, making it difficult for you to get new credit for a long time. It is a red flag to future potential lenders and suggests that you have ignored your financial obligations, as well as the opportunity to negotiate a suitable solution with a previous lender.
That is why it is advisable to try and settle a credit card debt before you have defaulted on your account and it is charged-off. Settling your credit card debt for less than you owe will require you to call your credit card customer service department and ask to speak to someone in the settlements department. You will need to explain your situation and let the person know that you would like to settle the account with the amount of cash you believe you can afford.
While it is possible that your credit card issuer will refuse to accept a partial settlement of your debt, it is just as likely that you may be allowed to settle for either a lump sum payment, a renegotiation of your payment terms which may give you more time – typically an extra 90 days – or a combination of the two, in order to settle your account before it gets charged-off.
In fact, many of the major credit card issuers like Bank of America, Chase, Citibank, Capital One and Discover allow pre-charge-off settlements combined with payment terms to help with your credit card debt.
For example, suppose you owe $5,000 on your credit card and your bank allows you to settle the debt for $2,400, but you’re entering your fifth month of missed payments. In order to forestall a charge-off, the bank will also extend the time you need to retire the loan by having you agree to pay $800 a month for the next three months – two months longer than the typical 180 days before an account is usually charged-off.
However, once you agree to the new payment terms, you must adhere to them, because you will not be given any extra leeway.
The Pros and Cons
The major advantage of settling before charge-off is that your credit rating will not be as negatively impacted than it would be if you wait too long before dealing with your delinquent account. In addition, banks are generally easier to work with than collection agencies.
If your account is charged-off and sold to a collection agency, you generally will have to cope with their more aggressive tactics. If your account is sold to an attorney, you risk getting sued.
The only potential drawbacks: You might pay more to settle with a bank than with a bill collector, and you will have less time to come up with the settlement money. Also, some banks will not work with debt settlement companies, but only with you directly to settle a debt before charge-off. If you are working with a debt relief firm, make sure you first ask your creditor about its policies.
In most cases, however, it is still advisable to settle your credit card debt before it is charged off. Your credit report will reflect the fact that you are a responsible borrower and other negative consequences, like being harassed by debt collectors, will be avoided.