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Understanding Credit Card Charge Offs and Debt Charge Offs

Charge-Offs: A definition

“Charge-off” is an accounting term used when a creditor removes from their list of assets the amount they expect to receive from a debtor. For accounting purposes, the debt is considered uncollectible. But most creditors will still make attempts to collect the debt, or turn it over to a collection agency. These attempts often continue for years.

Charge-offs hurt your credit

A charge-off damages a credit report. It is generally impossible to get real-estate financing (purchase a home) until the credit card charge-off accounts are paid-in-full, or settled-in-full. Even then, the fact that the account was charged-off in the first place can make it more difficult to obtain credit. This fact stays on the credit report for seven years.

Charge-offs go to collection agencies

When a creditor charges-off a debt, they will often assign it to a collection agency. Collection agencies usually put more pressure on debtors to pay a debt. Just having a collection agency involved puts more bad marks on a credit report, and they are harder to negotiate with than the original creditor in most cases.

What to do to avoid charge-offs

  • In a lot of situations, beginning to make regular payments is enough for creditors to report a debt as current or past-due rather than writing it off.
  • Many credit cards issued by banks will be brought current if the debtor enrolls in a credit counseling program and resume making regular payments.
  • Debtors can ask creditors to draw up a new loan for the amount owed with lower payments. Sometimes they may be willing to lower the interest rate as well.

The silver lining

A few good things come with having a debt charge-off.

  • After a debt charge-off, creditors are more willing to agree to a settlement for less than the original balance owed, because they already expect that it may never be paid at all. This fact is especially true if you can manage to pay a lump sum.
  • Most creditors will agree to stop charging interest and fees if payment arrangements can be made on charged-off debts.

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Disclaimer: Debt Shield, Inc. does not provide legal, tax or investment advice. Debt Shield, Inc. does not assist in the repair, modification, improvement, extension or correction of credit entries or reporting.