What is a Charge Off?
Posted By Soo J. Hong
There are many misconceptions about what a charge off really is. A Charge Off is when the lender removes a delinquent account from its accounting books thus resulting in the lender taking a loss on the account. Thus, it's basically an accounting term stating that the lender will no longer collect the debt. This, however, does not get rid of the debt itself. The borrower still owes the debt, but the lender just has given up collecting on the debt. However, once an account is charged off, it can be sold to a third party like a collection agency and the collection agency can still pursue the borrower for the debt, often times leading to a lawsuit. If the collection agency is successful in collecting the debt, then the collection agency gets to keep the money collected, thus, they will try hard and use any means to collect the debt. Charge offs are the choice of the lender. Even if the borrower intends on picking back up on the payments soon, the lender can still charge off the account. Filing bankruptcy will discharge the charged off debt thus, preventing the lender or any collection agencies from pursuing the debt further. Charge offs can happen after the borrower files bankruptcy. Lenders have 60 days to charge off accounts after bankruptcy. Thus, again, charge off is just an accounting term for lenders and does not affect whether the borrower still owes the debt. Only bankruptcy will allow you to discharge the debt.
As far as your credit score, charge offs have one of the worst impacts on your credit score. A charge off basically states that you have a history of not paying your bills. Additionally, the debt is still outstanding so there is no benefit of a charge off to the borrower. A successful bankruptcy, however, will allow you to discharge any charged off debts and start you on a path to building your credit.