When a consumer becomes severely delinquent on a debt (often at the
point of six months without payment), the creditor may declare the debt
to be a charge-off. It will then be listed as such
on the debtor's credit bureau reports (Equifax lists "R9" in the
"Status" column.) It is one of the worst possible items to have on your
file. The item will include relevant dates, and the amount of the bad
debt.
A charge-off is considered to be "written off as
uncollectable." A major reason for this involves taxes. Every year,
corporations file a Profit And Loss Statement with the Internal Revenue
Service. It is also made available to federal and state regulators, and
to shareholders. All of the year's bad debts (individual charged-off
accounts) are added together as an item in the "Loss" section of the P
& L Statement, and are deducted from the corporation's tax
return, much like other business expenses. To banks, bad debts and even
fraud are simply part of the cost of doing business.
However, the debt is still legally valid, and the
creditor can attempt to collect the full amount. This includes contacts
from internal collections staff, or more likely, an outside collection
agency. If the amount is large (generally over $1500 - $2000), there is
the possibility of a lawsuit.
Paying an old charge-off will not
remove it from your credit reports. It will simply be updated to a
"Paid Charge-Off," which, while slightly better, is still a seriously
derogatory item.
As per the Fair Credit
Reporting Act, a charge-off, whether paid or not, can remain
on a consumer's credit reports for up to seven years. The time limit is
based on the date of the original delinquency (i.e. when the debtor
missed a payment and never again became current), not
the date of the last activity. Thus, post-charge-off payments should not
"re-start the clock." See our article on Bad
Credit Time Limits for details.
Some debtors may be able to negotiate with the
creditor to have the item removed from the consumer's credit reports in
exchange for partial or full payment. This must be done directly with
the creditor, not with an outside collection
agency. The chances of success may depend on the amount of the debt and
settlement offered, the age of the item, and the particular creditor's
policies. If you attempt this, do everything in writing (keeping
copies), and be sure that the individual you are dealing with has the
authority to grant your request. Remember that your payment is your
leverage, and get a clear, valid, written agreement before you pay. If
you have already paid without a written agreement, then the creditor
will have no motivation to do you any favors.
If you have any charge-offs on your credit
reports, your ability to obtain credit will be seriously impaired, and
you must actively work to rehabilitate your
credit.
Credit Problems
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