The term charge off describes an accounting function followed by your lenders. When speaking of revolving consumer credit card accounts, a charge off occurs when the credit issuer either chooses, or must, recognize an unpaid loan balance as a loss.
For lenders, losses are bad news. The bad news gets reported and can affect anything from loan loss allowance/reserves, securitization, liquidity, even solvency.
Because of the bad news nature of a charge off, your credit card issuer will generally wait until the maximum time allowed to charge off your unpaid debt. The time frame for your creditor to recognize the loss on your unpaid credit card balance is outlined in Generally Accepted Accounting Principles (GAAP) and is typically 180 days of consecutive nonpayment, or what the Office of the Comptroller of the Currency (OCC) has designated as "seven zero billings". There will be instances where charge off will seem to occur at 210 days of nonpayment.
Most lenders will wait as long as is allowable to take the charge off hit to their books, but they can take the hit earlier. It's just not a common practice.
What does this mean to you?
While charge off is an important accounting function for lenders, it is also a major event that applies to, and will affect, the efforts of a consumer who is experiencing financial difficulty.
While you are trying to navigate your inability to pay all of your debts and when evaluating the different debt relief options available to you, understanding the timing and affects of your accounts charging off will give you a needed advantage in your planning and timing.
The period leading up to, during, and after a charge off of your unsecured debts will impact:
- Debt collection efforts with your original creditor
- Debt collection with outside collection agency
- Debt Purchaser/Debt Buyer and subsequent collection efforts
- Debt Settlement and Debt Negotiation
- Credit Reporting
- Credit Scoring
- Qualifying for Credit
- Debt Management Plans
- Benefits obtainable with Consumer Credit Counseling Services
- Account Re-aging
- Original Creditor Hardship Plans
- Risks of being sued on unpaid debt
- Biting the Bullet and Filing Bankruptcy
- Delaying or Avoiding Bankruptcy
The bulleted items above are deserving of separate articles as each would apply to a credit card charge off event and you're planning, strategies and timing. Suffice to say, while the term "charge off" refers to a simple accounting principle, the charge off event obviously impacts more than the banks non performing credit card assets.