A charge-off or chargeoff is the declaration by a creditor (usually a credit card account) that an amount of debt is unlikely to be collected. This occurs when a consumer becomes severely delinquent on a debt. Traditionally, creditors will make this declaration at the point of six months without payment. A charge-off is a form of write-off.
Legal consequences of a charge-off
While a charge-off is considered to be "written off as uncollectable" by the lender, the debt is still legally valid, and remains as such after the fact. The creditor has the right to legally collect the full amount for the time periods permitted by the statutes of limitation based on the location of the financial institution and where the consumer resides. Depending on the location, this amount of time may be a certain number of years (e.g. 3 to 7 years), or in some places, indefinitely. Methods of collection that can be used include contacts from internal collections staff, outside collection agencies, arbitration, or a lawsuit.
The purpose of making such a declaration helps support a tax deduction for bad debts under Section 166 of the Internal Revenue Code. In that respect it is a form of write-off. Bad debts and even fraud are simply part of the cost of doing business. The charge-off, though, does not free the debtor of having to pay the debt.
Effects on credit report
A charge-off is one of the most adverse factors that can be listed on a credit report. It will then be listed as such on the debtor's credit bureau reports (Equifax, for instance, lists "R9" in the "status" column to denote a charge-off.) The item will include relevant dates, and the amount of the bad debt. This may make obtaining any unsecured or even secured credit more difficult.
If the charge-off has been paid in full, it will be listed on the credit report as "paid in full." If settled for less than the amount due, it will be listed as "settled." Even such a listing on a credit report can be negative.
Effects on banks
As the charge-off number climbs or becomes erratic, officials from the bank's regulators take a close look at the finances of the bank. They may impose various operating restrictions on the bank, and in the most extreme cases, may close the bank entirely.
- Cackley, Alicia Puente (2009). Credit Cards: Fair Debt Collection Practices Act Could Better Reflect the Evolving Debt Collection Marketplace and Use of Technology. United States Government Accountability Office. p. 5.
- "Bad Debts and Charge-Offs". Retrieved 2007-07-12.