Charge-off

In simple terms, a charge off is a debt that has gone from late, to bad. Debts are charged off after being deliquent for 180 days. It does not mean a person no longer owes the debt, it is just an accounting term (and bad entry on a credit report).

Thank you Morningstar.

Welcome to the Community :D Also, be aware that just because a debt is charged off, doesn't mean they won't sell it to a third party colletor.

I have had this happen to me- the debt was charged off, and a junk debt buyer bought it, and now have to deal with a collection agency!

Feel free to ask question, we ar here to help, and many of us have gone through the same thing!..KAren

I made a big, long post about this about 6 months ago. Can't find it now, and our search feature seems to be gone for the moment ... so I'll sum it up.

Like Morningstar said, a "chargeoff" is simply the way a creditor accounts for its bad debt. Doesn't mean you don't owe the money, and they can still try to collect after an account is charged off.

Suppose a bank has $10 Million worth of credit card accounts (that is, all the individual customers owe the bank $10M). All those receivables sit on the banks' books as a current asset- a measure of what the bank is actually worth. Theoretically, if the bank stopped doing new business and every customer paid their entire account off, then the bank would be worth $10M dollars and could distribute all that cash to its shareholders.

A company/bank needs to be able to measure its current net worth -- (IE if it went out of business today, what funds would be available to distribute to the shareholders?) On that note, enter the concept of bad debt.

An account that is delinquent anywhere between 90-180 days, is considered non-performing. The liklihood of actually collecting that money back is slim-to-none. When an account is non-performing, then is considered as bad debt. Just like a bad check -- it has value on paper, but in reality it is worthless.

For a company to measure its' true net worth, it cannot count bad debt as an asset. Back to my example, if a bank has $10M in credit accounts, but $2M of those accounts are non-performing, then the company can really only expect to collect $8M if it went out of business today. Leaving bad debt "on the books" just makes a company look better on paper than it really is. (Suppose I write you a $2 Million check, you could call yourself a millionaire. But if you are never able to cash it, then you're only kidding yourself to keep thinking you're rich).

Chargeoffs are a way of "balancing the books" to bring the numbers back down to reality, and reflect what the company is actually able to collect at any given point in time. When an account is deemed as "bad debt" after 90-180 days delinquent, it gets charged to a loss reserve (which sits as a contra-asset against the entire outstanding receivables portfolio).

It's a little tricky and could take me another 4 pages just to explain the accounting behind it. But the bottom line is that A) chargeoffs simply offset what the company is really worth, and B) charged-off doesn't mean erased - you still owe it and they can still collect on it.

Debtcruncher, I did a search with your name and the word "charged off". This link came up. I think you are referring to this one in your post.

http://www.debtconsolidationcare.com/settlement/chargedoffdebt.html

Thanks Weeswie. I spent about 10 mins trying to find that post in all "My Threads" and I couldn't. Guess it was because I posted it as a guest.

For some reason, the search feature of this website is not showing up for me -- used to be on the sidebar. Where did it go to?

DebtCruncher, I think we have fixed the server issues that we were having last month. I will try to put back the advanced search feature on the website.