CHARGE OFF - Exactly how does this work?
Date: Mon, 09/21/2009 - 11:18
Just wondering, as I've never had anything charged off before.:confused:
A charge off just means that the credit card company is taking y
A charge off just means that the credit card company is taking your debt as a loss on their books. When they charge it off, they usually sell it to a debt buyer for around 20 cents to the dollar. The debt buyer then is the company you now owe the debt to.
and then how do you get the debt buyer off your back?
and then how do you get the debt buyer off your back?
The debt buyer/debt collection company will want to settle. I wo
The debt buyer/debt collection company will want to settle. I would offer a low settlement of 30% first and get their response. Don't let them scare you and have them put all offers in writing. Also, ask them to substatiate that they now own that debt and provide proof that you owe the debt. When you do settle, make sure they provide you with documents showing settlement and that they will report that debt as settled to the credit reporting agencies.
The thing is, they will try to confuse you on the meaning of cha
The thing is, they will try to confuse you on the meaning of charge-off and write-off. I had a Citi representative try this with me today. I just acted befuddled, but I knew they were blowing smoke.
She kept saying, Citi won't accept a $XXX or 75% write-off. I said, the account has already charged-off (i.e. it's already been written off at 100%). She either didn't want to come clean on that, was confused herself, or something altogether different. I just kept saying, I don't understand, wasn't this written off already when the chargeoff ocurred? What's the difference between a write-off and charge-off? Then she went on and on that they couldn't settle with me for that low of an amount because they were "saving" me the tax liability that I'd have to pay on the settlement amount. They were just being the good guys here and saving me from the IRS!!! Yeah, right.
When an account charges off, they write-off the balance down to zero. They still maintain the right to collect the debt, but they've already recorded it as a loss on their financial statements. So if they eventually collect it, then whatever they collect is 100% gain on their part.
Hi Ball, The creditor will have to adjust their books if they r
Hi Ball,
The creditor will have to adjust their books if they retained the right to collect and were to eventually collect any portion of the prior amount charged off.
Mileage may vary
Quote:When an account charges off, they write-off the balance do
Quote:
When an account charges off, they write-off the balance down to zero. They still maintain the right to collect the debt, but they've already recorded it as a loss on their financial statements. So if they eventually collect it, then whatever they collect is 100% gain on their part. |
Not necessarily true. A chargeoff is not a direct write-down of the asset. Rather, a chargeoff affects the balance sheet, where a writeoff affects the income statement. Accounts are actually written off incrimentally long before they're charged off.
I've written several threads on chargeoffs, some quite lengthy. A chargeoff is just an accounting term, in short it means that the loan balance was "charged" against a loss reserve (sometimes called a reserve for bad debts). The reserve is a contra-asset that sits on the balance sheet opposite the loan receiveables. It serves as a measure to de-value the loan receivables in anticipation of expected loan losses. In laymans terms, the loss reserve contra gives the accountants a "picture" of what they should realistically expect to collect on their loans, knowing that they won't ever get 100% paid back.
If you can imagine, that when you take out a loan or credit card, the bank knows before they even give you the money that a certain portion of it won't be paid back. And so they start accounting for your bad debt before you even stop paying on it. Basically every month, they set aside a certain percentage of their overall receivables (based on historical performance, current trends and lots of formulas), and write it off as an operating expense. You weren't even delinquent yet, and they were already writing off portions of your balance. This is the loss reserve.
Now when an account finally stops paying and deemed as bad debt, then it is "charged" against that loss reserve (which was already created and funded long before the debt actually went bad). A chargeoff isn't a direct expense, it really does not touch the income statement. Rather it debits the contra-asset and affects the balance sheet by reducing their loss reserve.
Now that does not mean the balance is zero, or that they can't collect. They have several options: 1) They can retain ownership and collect or even sue for the balance. They may or may not settle, depending on the overall collectibility of that account. Or 2) They might sell that debt at discount (less than face value) to a debt buyer, who can then attempt to collect on the account up to face value.
Quote:
The creditor will have to adjust their books if they retained the right to collect and were to eventually collect any portion of the prior amount charged off. |
They're not really "adjusting." That would mean going back in time and generating new financials = too much work, and not practical. I mean, everything is accounted for in business, and so when they debit their bank account by receiving a payment or selling the debt, they have to credit something. That "something" is considered a loan loss recovery, and credited back into the loss reserve. In crediting the loss reserve, they are basically funding other future chargeoffs.
... that completes today's lecture in Loan Accounting 102, join me tomorrow where we'll discuss frozen accounts and the effects of paid but unrealized interest as a measure for writing off accounts without taking any losses ...
Uh... what he said. Hey Crunch, You have some back ground in th
Uh... what he said.
Hey Crunch,
You have some back ground in this.
I suspect every card issuer hit, and exhausted, their prior set reserve for card loss this year as we are at historical highs for revolving line losses.
Would you agree?
If so, would you also agree that it is possible for the bank to deploy a little GAAP alchemy and extend the loss reporting in some subtle ways, even if only by a quarter?
I am not talking about adding to their reserve, they have had to, and will continue to do that.
I am working on a little theory, based on what I am seeing where the goal posts are being moved by a month or 2 when calculating the best time to settle.
You got an hour?
Mileage may vary
Uh... what he said. Hey Crunch, You have some back ground in
Uh... what he said.
Hey Crunch,
You have some back ground in this.
I suspect every card issuer hit, and exhausted, their prior set reserve for card loss this year as we are at historical highs for revolving line losses.
Would you agree?
If so, would you also agree that it is possible for the bank to deploy a little GAAP alchemy and extend the loss reporting in some subtle ways, even if only by a quarter?
I am not talking about adding to their reserve, they have had to, and will continue to do that.
I am working on a little theory, based on what I am seeing where the goal posts are being moved by a month or 2 when calculating the best time to settle.
You got an hour?
Mileage may vary
Now you guys have me thoroughly confused. I just want to get ou
Now you guys have me thoroughly confused. I just want to get out of debt permanently within the least amount of time possible because I will be 65 in 3 years. After going over the numbers and figuring out how long the debt management program will take and what I will pay, I believe settlement is my best bet. I just don't want to be chased by the "ghost of creditors" into the future.
Quote:Originally Posted by AnonymousUh... what he said. Hey Cr
Quote:
Originally Posted by Anonymous Uh... what he said. Hey Crunch, You have some back ground in this. I suspect every card issuer hit, and exhausted, their prior set reserve for card loss this year as we are at historical highs for revolving line losses. Would you agree? If so, would you also agree that it is possible for the bank to deploy a little GAAP alchemy and extend the loss reporting in some subtle ways, even if only by a quarter? I am not talking about adding to their reserve, they have had to, and will continue to do that. I am working on a little theory, based on what I am seeing where the goal posts are being moved by a month or 2 when calculating the best time to settle. You got an hour? Mileage may vary |
Someone else,
I run a finance company, not a bank. My active portfolio at it's largest is about $4 million. And we're privately owned, not publicly traded. The accounting principles are basically the same, but banks operate on a much larger scale then I do.
Now I can't quite say that they would've exhausted their reserves. Yes, their rate of default and chargeoffs have gone up significantly in this economy. But it didn't really happen all at once, it has been rising over the last several years. With a good CFO, he'd have caught the rising trend in the beginning and adjusted the reserve ratios to compensate as it was all unfolding. Negative reserves are a very bad thing.
"GAAP alchemy" is possible. I have my own ways of minimizing our loan losses (nothing illegal, I guarantee!) Keep in mind though - banks have shareholders, the SEC and the FDIC to report to, and who closely audits them. If they screw around with the numbers too much and get caught, FDIC will take over the bank and CFO goes to jail. Why, what's your theory?
Quote:Originally Posted by aubreyNow you guys have me thoroughly
Quote:
Originally Posted by aubrey Now you guys have me thoroughly confused. I just want to get out of debt permanently within the least amount of time possible because I will be 65 in 3 years. After going over the numbers and figuring out how long the debt management program will take and what I will pay, I believe settlement is my best bet. I just don't want to be chased by the "ghost of creditors" into the future. |
Aubrey, sorry I did get sidetracking and expanded moreso on other replies than your original question.
A chargeoff doesn't mean that they don't come after you for the balance. You still legally owe it, and they can still collect on it. As to who collects depends on their policies and collection philosophy.
Most credit cards will chargeoff the account, and then sell your account to a JDB for a fraction of what you owe (in this sense, they are at least recouping some of that balance). The JDB can then attempt collection for the balance owed -- they might settle for less than full balance, or if they are an aggressive JDB, they might sue you for the full balance.
Some credit cards chargeoff, but don't sell it (in hopes that they might ultimately recover more than they would by selling it to a JDB). They might keep the collections in-house and their own collectors will call you; they might file suit against you; or they might send the account to an outside collections agency (who collects for the credit card, but sends them any money you might pay since the CA doesn't own the account).
Thanks for the response Crunch. My theory on the alchemy is not
Thanks for the response Crunch.
My theory on the alchemy is not illegal, or even necessarily gray area.
Its payment application. If leading up to default, there were any payments over minimum, may the prior payment(s) application be backed out and applied as a partial payment(s), pushing the charge off date out a month or two? The affect of which, can
move the charge off goal post.
Ah I see what you're getting at. Well in a sense, it is possib
Ah I see what you're getting at.
Well in a sense, it is possible. I've done it before and here's my example as it applies to installment (not revolving) accounts: Customer has a set monthly payment (say $200/month). If a payment is not received within 10 days, the computer assesses a $10 late charge -- which sits in a separate hopper (ie it's not added to the principal). If customer pays their LTC and sends in $210, then $200 gets applied to the regular payment, and $10 gets applied to late charge due. Suppose they've paid 20 x late charges over the course of the loan ($200) -- in my computer system I am fully capable of re-applying all those payments to restribute the $210 payments to the principal instead of any late charges. In that sense, the customer is paid ahead by one full payment (but the system would then show $200 in late charges due). .... I've only done this once or twice for a good customer that needed to skip a month and didn't want it to affect his credit report.
BUT..............
For revolving accounts, they are a balance-forward application. Payments and charges are applied in a certain statement period; at the end of the period that billing cycle is closed, and the balance-forwarded to the new cycle.
We don't do revolving accounts, but we have a $40K computer system that has that module built-in, and I've played with it. At least in our system, once a billing cycle is closed out and a statement generated, the system will not let you re-open that cycle and post or adjust transactions to it.
And if you think about, it makes sense for the system to prevent you from doing that. FCBA requires accurate statements to be sent out to the customer. If you can go in and re-apply payments or post new transactions after the customer has already been sent a statement, you are opening yourself up to lawsuits and liability for violating FCBA.
AND SO, what you suggest is definitely possible. My system won't let me do it even if I wanted, but that's not to say a different computer software can't.