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 on your bills, unable to keep up with payments on your credit cards
and other debts, sooner or later you will hear a creditor representative threaten 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't "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 attempts 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 punish 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 ruination 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 should 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 they cannot
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't afford just to preserve 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 hasn't happened yet:
- Don't be intimidated or threatened by collection tactics. Keep a cool head and
don't 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. Don't 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 don't 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 won't 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't work out a deal with the collection agency assigned to your account,
then wait until it goes to another agency! Eventually, 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 doesn't 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, don't disclose your checking
account details, and follow up to make sure the creditor 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.
Charles J. Phelan has been helping people become debt-free without bankruptcy since 1997.
A former executive in the debt settlement industry, he teaches the do-it-yourself method
of debt negotiation. Audio-CD material plus expert personal coaching helps consumers achieve
professional results at a fraction of the cost.
