Many creditors threaten their borrowers with charge-off and make it sound as though it is the end of healthy financial life. This happens if you fail to make regular payments on your bills. This term scares many people. This article explains everything you need to know about charge-off.
As the term charge-off includes the term charge, many people think term means cancellation of the account by the creditor. This means you cannot pay for anything with your credit card. But it not what the banks mean. According to banks and bill collectors, a “charge-off” is the point at which the creditor writes off the outstanding debt as a “bad debt.” This normally occurs after 6 consecutive months of non-payment. From this point onwards, they do not consider your debt in their books as an asset. As you still owe the money, the creditor will continue their efforts to recover it from you. But the rules of accounting force the creditor to nullify your debt in their accounting books. To compensate for this loss, they penalize you by putting a negative remark on your credit report. A “charge-off” is a harmful negative mark, but it is not the financial disaster that your creditor would want you to believe.
Try to prevent charge-offs as much as you can. But do not get scared, if your account has been charged off. Most of the times, bill collectors give you an impression that charge-off is the worst that can happen to you and they put excessive force on the borrowers that most of them succumb and commit to making payments that they fail to honor. Collectors generally ask you to pay by post-dated checks, and this causes bounced checks and in worst case, financial ruin. Many persuaded by the banks and media about credit. Though having good credit is essential, agreeing to make payments that you cannot honor simply to save your credit, doesn’t make sense.
Follow these simple rules to adopt while attempting to prevent a charge-off that hasn’t taken place yet.
Do not allow the pre-charge-off collection tactics to scare or cow you. Remain calm and do not take it personally when collectors attempt to irritate you.
Contact your creditor to check out the minimum payment needed to prevent the charge-off, and next lot of payments to keep the account updated. Don’t agree to make this payment and further payments unless you are certain you can honor them.
Bargain with the creditor to make a lump-sum settlement of at most 50%, if you can afford, or chalk out a plan to make monthly payments that you can easily afford.
Do not accept the bill collectors’ suggestion that you can give post-dated checks, or submitting your checking account details telephonically. Always pay through cashier’s check or money order.
Don’t pay simply on the basis verbal agreement. Ask for the agreement in writing and signed by a creditor representative, with capacity of authorizing the workout plan.
If you do not have money to prevent the account from being charged off or if it has already been charged off by the lender, you can save yourself by taking the following steps:
Do not panic.
Accept you still have a chance to sort out the matter by negotiating with the actual lender or the collection agency responsible for your account.
Bargain for a lump-sum settlement with the creditor or collection agency. Aim to pay 50% or less, and ask the charge-off to be erased from your credit report as a pre-condition to the settlement. Many lenders will not accept it, but still make an attempt. If they accept, ensure they will update your credit report to tell your prospective creditors that the issue has been sorted out.
If you fail to cut a deal with the collection agency responsible for handling your account, wait till it is handed over to another agency. Ultimately it will be handed over or sold to an organization with whom you can deal to sort out the matter.
To summarize, a charge-off does not cause financial ruin. Try to avoid it as much as you can, but do not worsen the situation by accepting to make the payments that you cannot make. Your creditor is not interested in a charge-off, just like you. Hence use this information to your benefit by making a mutually acceptable agreement. Write down the terms of agreement, do not give out the details of your checking account and follow up to ensure the lender gives the correct status of your account to the credit bureau. In the end, it is simpler to sort out a charge-off situation before it takes place or sort it out, once it has happened.