Have you been told by a creditor that your debt is about to "charge-off"? Did the bill collector make it sound like you will be ruined financially if you allow this catastrophe to happen? If you're behind your bills, unable to keep up with payments on your credit cards and other debts, sooner or later you will hear a credit representative represent you with the dreaded "charge-off." So what is a charge-off anyway? Should you be worried? What are the consequences of this mysterious event?
I'll start by explaining what a charge-off is NOT. Because the term includes the word "charge," many people mistakenly think it has to do with cancellation of the account by the creditor. In other words, you can not "charge" anything on your credit card anymore. But it's not the same thing at all, and most banks will revoke charging privileges around 2-3 months before the deadline we're talking about here.
What banks and bill collectors call a "charge-off" is the point at which the creditor writes off the account balance as a "bad debt." It usually happens after six months of non-payment. After that, they no longer count it on their books as an asset. You still owe the money, of course. And they will certainly make continued requests to collect it from you. But the creditor has been forced by the rules of accounting to zero out the debt on their financial ledgers. For causing this loss, they will penalize you by placing a derogatory mark on your credit report. A "charge-off" is a serious negative mark, to be sure, but it is not the financial ruin that debt collectors would like to have you believe it is.
Should charge-offs be avoided if possible? Certainly. Does the prospect of a charge-off mean you need panic if you have no way to pay the bill? No! Is it the end of the world if the account has already charged off? No! Too often, bill collectors make a charge-off sound so bad, and they apply so much pressure, that people cave in and make payment commitments that they can not keep. Collectors usually demand payment via post-dated checks, and this frequently leads to bounced checks and even worse financial problems. Most of us are brainwashed by the banks and media on the subject of credit. Sure, good credit is important. But committing to payments you really can not afford just to reserve your credit is like watering the lawn while your house is burning down.
Here are a few simple rules to follow when trying to avoid a charge-off that has not happened yet:
* Do not be intimidated or threatened by pre-charge-off collection tactics. Keep a cool head and do not take it personally when collectors try to get under your skin.
* Call your creditor to find out the minimum payment necessary to avoid the charge-off, and subsequent payments to keep the account current going forward. Do not commit to this payment (or series of payments) unless you're sure you can follow through.
* Negotiate a lump-sum settlement at 50% or less if you have the resources, or a workout plan for monthly payments that you can live with.
* Do not allow bill collectors to talk you into using post-dated checks, or providing your checking account details over the telephone. Instead, make payments via cashier's check or money order.
* Do not make payments based on a verbal arrangement. Get the deal in writing and signed by a creditor representative who has authority to approve the workout plan.
What should you do if you simply do not have the money to rescue the account from charge-off, or if the account has already been charged off by the creditor?
* Take a deep breath and relax; The sky will not fall on your head just because you had a charge-off.
* Realize that you still have an opportunity to resolve the matter by dealing with the original creditor or the collection agency assigned to the account.
* Negotiate a lump-sum settlement with the creditor or collection agency. Again, aim for 50% or less, and ask for the charge-off to be deleted from your credit report as a condition of the settlement. (Most creditors will not agree to this, but it's worth asking anyway. Do be sure that they will update your credit report to show that the matter has been resolved and the account has been satisfied.)
* If you can not work out a deal with the collection agency assigned to your account, then wait until it goes to another agency! Occasionally, it will either be assigned or sold to an outfit that you can deal with to get the matter cleared up.
To sum up, a charge-off is not the end of the world. It should certainly be avoided if possible, but not at the risk of making things worse by committing to payments you're not sure you can keep up with. Just remember that the creditor does not want to see a charge-off any more than you do, so use that knowledge to your advantage in working out a mutually acceptable arrangement. Get everything in writing, do not discern your checking account details, and follow up to make sure the credit reports the matter correctly on your credit report. You'll find that it's easier than you think to resolve a charge-off situation before it happens, or clean it up if it's already taken place.