A charge-off or chargeoff is a declaration by a creditor (usually a

credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the ...

account) that an amount of debt is unlikely to be collected. This occurs when a consumer becomes severely delinquent on a debt. Traditionally, creditors make this declaration at the point of six months without payment. A charge-off is a form of

write-off A write-off is a reduction of the recognized value of something. In accounting, this is a recognition of the reduced or zero value of an asset. In income tax statements, this is a reduction of taxable income, as a recognition of certain expenses ...

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 so after the fact. The creditor has the right to legally collect the full amount for the time period permitted by the

statute of limitations A statute of limitations, known in civil law systems as a prescriptive period, is a law passed by a legislative body to set the maximum time after an event within which legal proceedings may be initiated. ("Time for commencing proceedings") In ...

applicable to the location of the financial institution and the consumer's residence. Depending on the location, this period may be a certain number of years (e.g. three to seven years) or, in some places, indefinite. Methods of collection that can be used include contacts from internal collections staff, outside

collection agencies Collection or Collections may refer to: * Cash collection, the function of an accounts receivable department * Collection (church), money donated by the congregation during a church service * Collection agency, agency to collect cash * Collection ...

arbitration Arbitration is a form of alternative dispute resolution (ADR) that resolves disputes outside the judiciary courts. The dispute will be decided by one or more persons (the 'arbitrators', 'arbiters' or 'arbitral tribunal'), which renders the ...

, or a

lawsuit - A lawsuit is a proceeding by a party or parties against another in the civil court of law. The archaic term "suit in law" is found in only a small number of laws still in effect today. The term "lawsuit" is used in reference to a civil act ...

United States

Tax regulations

In the United States, federal regulations require creditors to charge off

installment loan An installment loan is a type of agreement or contract involving a loan that is repaid over time with a set number of scheduled payments; normally at least two payments are made towards the loan. The term of loan may be as little as a few months an ...

s after 120 days of delinquency, while

revolving credit Revolving credit is a type of credit that does not have a fixed number of payments, in contrast to installment credit. Credit cards are an example of revolving credit used by consumers. Corporate revolving credit facilities are typically used to ...

accounts must be charged-off after 180 days. The purpose of making such a declaration is to help support a

tax deduction Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and tax credits ...

for bad debts under Section 166 of the

Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 2 ...

. In that respect it is a form of

. 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 Adverse or adverse interest, in law, is anything that functions contrary to a party's interest. This word should not be confused with averse. Adverse possession In property law, adverse possession refers to an interest in real property which is ...

factors that can be listed on a

credit report :''This article deals with the general concept of the term credit history. For detailed information about the same topic in the United States, see Credit score in the United States.'' A credit history is a record of a borrower's responsible repa ...

. It will then be listed as such on the debtor's credit bureau reports (

Equifax Equifax Inc. is an American multinational consumer credit reporting agency headquartered in Atlanta, Georgia and is one of the three largest consumer credit reporting agencies, along with Experian and TransUnion (together known as the "Big Th ...

, 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 number of charge-offs 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.

References

External links

What is a charge-off?Charge-offs in the United States
��history since 1985, by the Fed {{DEFAULTSORT:Charge-Off Credit Debt