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Charge-Off Definition
A charge-off is an accounting term used by creditors to mean a debt is not collectible and is being written off as a loss on their financial statements. This usually happens after a borrower has missed payments on an account for an extended period of time, 120 to 180 days depending on the creditor and type of account.
Charge-Off Facts:
Credit Reports:
- When a debt is charged off it’s reported to the credit bureaus as a negative item, big hit to the borrower’s credit score.
- The charge off notation stays on the credit report for up to 7 years from the date of the first missed payment that caused the delinquency.
Debt Still Owed:
- Although the creditor writes off the debt as a loss, the borrower is still on the hook for it.
- The creditor may sell the charged off debt to a debt buyer or transfer it to a collection agency to try to collect.
Not Debt Forgiveness:
- A charge off doesn’t mean the debt is forgiven or cancelled. It’s just an internal accounting entry.
- Borrowers may still be subject to collection, lawsuits or garnishment to collect the amount owed.
Types of Accounts that get Charged Off:
- Credit cards, personal loans, auto loans and mortgages are the most common.
Charge-Off Rehabilitation:
- Borrowers can sometimes negotiate with the creditor to settle the debt or set up a payment plan.
- In some cases paying off a charged off account will update the status on the credit report to “Paid Charge-Off” or “Settled”. Charge-offs matter. Period. For both borrowers and creditors.