What are Charge Offs
Charge-offs will appear on credit reports in case of delinquency, if consumer stops paying on a credit card or an installment loan. After about 6 months of not paying, the debt becomes severely delinquent. At this point the creditor can claim the whole unpaid balance and accumulated interest as a "CHARGE OFF".
Depending on the type of the delinquent debt, charge-offs are shown under credit report derogatory accounts section with a status of I9 or R9 and termed CHARGE OFF. That is very bad since the delinquent debt is deemed uncollectible and consumer's credit rating and score will decline badly. See more credit rating indicators here.
How credit companies use charge offs
Charge offs are tax deductible for credit corporations. Each year credit corporations file Profit and Loss statement, just like every working individual files for income tax. Charge offs are considered losses and are deducted from the creditor total gross income as an expense or cost of doing business. Just like a self employed plumber or carpenter deducts cost of tools, materials and other supplies as an expense. By doing so, credit corporations save huge money each year in taxes.
Better yet, this written off debt is still legally valid, and the creditor can try to collect the full amount. The creditor can use its own collection department or the debt can be sold to a collection agency. If consumer owes a significant amount, like several thousand dollars, creditor can file a lawsuit.
If consumer pays a charge-off it still shows up on credit reports. The Terms will be changed to a "PAID CHARGE OFF" and isn't much better. Credit score will likely go down initially after the payment.
According to the Fair Credit Reporting Act, a charge-off, whether paid or not, remains on a consumer's credit reports for seven years. The time limit is based on the date of the original delinquency when the debtor missed payment and never again became current, not the date of the last activity. Thus, post-charge-off payments should not restart the clock. See Bad Credit Time Limits for more information.
What consumer can do about charge offs.
Consumer can try to negotiate with the creditor to have the CHARGE-OFF 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. Everything must be in writing and all the paperwork from the exchange should be kept indefinitely. Consumer needs to make sure that whoever negotiates on the creditor behalf, has a proper authority to deal with these issues.
Remember you, a consumer, have some leverage since you offer to satisfy already written off debt, so make sure to get a clear official written agreement before you pay. If you pay prior getting such an agreement, then credit company has no incentive whatsoever in removing charge off from your credit report.
Use this letter as a sample when start negotiating with the creditor.
If you have charge offs on your credit reports you need to start working diligently on credit repair.
