What Exactly Does Charge-Off Mean?
One the most common misconceptions that many consumers have is that they don’t think they owe a debt when they actually do.
Often they hear a debt collector or creditor say that the debt owed has been charged-off.
When they hear it some think that it means that the debt they owed is no longer owed.
So what exactly does “charge off” mean?
Charge off simply means that a creditor has taken a debt and moved it from profit to loss on its balance sheet. It is claimed as a loss because the creditor has deemed the debt uncollectible.
Why do creditors do this?
Credit card companies collecting consumer related debt have to comply with both the IRS and FDIC rules. When the credit card company claims the debt as charged off, they are making a representation that the debt is not collectible.
To be consistent with that representation, their actions must reflect their representations made to the IRS.
Even big creditors don’t want problems with the IRS after all.
When a creditor does this, the IRS allows it to charge off the debt which will give the creditor a benefit for tax purposes.
The debt still exists though. It is usually, but now always, sold to a debt buyer or is placed for collection with a collection agency.
Rules to be followed when charging-off debt
Creditors collecting consumer, not business debt, must follow certain rules when it comes to credit reporting and privacy issues. These rules come from the Fair Credit Reporting Act, “FCRA”.
The first rule is that an account is charged off 180 days from the date of the last payment received by the consumer.
That date is known as the date of “first delinquency”. Under the FCRA, first delinquency comes from the phrase, “commencement of the delinquency” 15 U.S.C. § 1781c(c)(1). Commencement is when the first payment is missed.
So when a debt is first reported on your credit report, it is reported for seven years and 180 days from the start of the delinquency.
Sometimes a creditor will place an account for collection prior to the 180 days from the date of the last payment received. That’s perfectly legal.
What does re-aging a debt mean?
A charge-off is only allowed to reported once by a creditor on a credit report. Sometimes, collection agencies or debt buyers will report a new start date when a consumer admits or acknowledges a debt.
Sometimes these companies will even re-report the new date when a payment is made.
Neither of these two activities are legal. Bill collectors do this to re-age the account. Re-aging the account means that the debt is kept longer on a consumers credit report.
This will make repayment of the debt far more likely. No one wants a bad credit score.
The FTC even sued a very large collection agency, for re-aging debt by using what the FTC claimed were reporting later-than-actual delinquency dates to credit bureaus.
Apparently, this company ended up paying 1.5 million dollars to settle the claim.
Instead, the FTC and the collector company stipulated (agreed) to a final order for settlement purposes only. This type of agreement means that there was no admission of liability by the collector.
Many companies agree to these types of actions to avoid the expense of litigation. The FTC’s Complaint was merely a set of
To stop this from happening to you, it is very important that you order your free credit report from annualcreditreport.com on a periodic basis especially if you have a lot of debt and have had problems paying that debt.
Keep your credit reports, don’t throw them away. That will often be the only way to actually prove that the delinquency date was moved.