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Knowing what charge-off means can make debt resolution an easier process.
When you go past due on a debt, you the phone calls begin pleasantly enough. Customer service representatives try to gently move you to make a payment, almost apologetically so.
But within a few months of missing a payment, they start talking in ominous terms about charging off your account.
Nobody explains it to you, but it sure sounds scary.
Here’s what you need to know about charge-offs.
“Charge Off” Is An Accounting Term
A charge-off is an indication by a creditor that it has no belief that a debt will be collected.
Federal regulations require creditors to charge-off installment loans after 120 days of delinquency, and revolving credit accounts such as credit cards after 180 days.
A charge off is a bookkeeping entry that has no effect on your obligation to pay.
Until A Debt Is Charged Off, You Deal With The Creditor Directly
Most of the time, collection calls about a past due account will come from the creditor rather than an outside debt collection company. For this reason, the calls may be friendlier and less coercive.
The creditor is being nice to you in the hope that you’ll pay the debt voluntarily.
Once The Debt Is Charged Off, It Is Usually Sold
The creditor is forced to charge off the debt after (in the case of credit card debts) 180 days, signaling that there’s not much change of getting paid.
To reduce the loss involved, the debt is sold to a debt buyer. Often, the transactions involving the sale of the debt is negotiated years in advance through what’s called a forward-flow agreement (sometimes also called a future flow agreement).
You Still Owe The Debt, Even If It’s Sold For Pennies On The Dollar
It doesn’t matter how little a debt buyer pays for your account. If you owed the money before the sale, you owe still owe it.
The debt buyer can still sue you for the full balance due on the account.
The debt buyer may be willing to cut you a better settlement deal – or not – but that has nothing to do with the price paid for the account.
A Charge Off On Your Credit Report Is A Negative Notation
Whenever you don’t pay a debt according to the original terms of repayment, that’s bad for your credit.
A charged-off debt is bad not only because it indicates that you didn’t pay the debt according to the original terms, but that it’s still outstanding and the creditor has no realistic hope of you ever paying it back.
Account For Charged-Off Debts In Your Debt Relief Efforts
If you have charged off debts on your credit report and decide to file for bankruptcy, you should include those debts in your bankruptcy case.
If you’re going through debt settlement or credit counseling, account for those charged-off accounts.
If you’re paying off your old debts, pay the charged-off ones as well.
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