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What a Charge Off Means

What does a “charge off” mean?  How does it affect the lender as well as the borrower? 

A charge off occurs when the lender determines that a debt is non-performing or uncollectable. At this time the lender considers the amount a loss for accounting purposes.  Although the account is a charge off, the borrower still owes the money.  In addition, the charge off will appear on the borrower’s credit report for seven years.  A paid charge off always reflects better than a non-paid charge off. 

If a creditor has charged off a credit card account, then why is a collection agency calling looking for payment? 

The term charge off only means that the creditor has internally reclassified your account from a profitable account to an unprofitable one.  Companies often sell their non-performing loans to collection agencies for pennies on the dollar, and the collection agency then seeks repayment. Either way, the creditor or its successor - the collection agency, can sue and win a judgment for the full amount of the debt.  If the creditor or collection agency sues and wins a judgment against you, that information can also be placed on your credit report.

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