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When
a consumer becomes severely delinquent on a debt (often at the point of six
months without payment), the creditor may declare the debt to be a charge-off.
It will then be listed as such on the debtor's credit bureau reports (Equifax
lists "R9" in the "Status" column.) It is one of the worst
possible items to have on your file. The item will include relevant dates, and
the amount of the bad debt.
A charge-off
is considered to be "written off as uncollectible." A major reason
for this involves taxes. Every year, corporations file a Profit And Loss
Statement with the Internal Revenue Service. It is also made available to
federal and state regulators, and to shareholders. All of the year's bad debts
(individual charged-off accounts) are added together as an item in
the "Loss" section of the P & L Statement, and are deducted from
the corporation's tax return, much like other business expenses. To banks, bad
debts and even fraud are simply part of the cost of doing business.
However,
the debt is still legally valid, and the creditor can attempt to collect the
full amount. This includes contacts from internal collections staff, or more
likely, an outside collection agency. If the amount is large (generally over
$1500 - $2000), there is the possibility of a lawsuit.
Paying
an old charge-off will not
remove it from your credit reports. It will simply be updated to a "Paid Charge-Off,"
which, while slightly better, is still a seriously derogatory item.
As
per the Fair Credit Reporting Act, a
charge-off, whether paid or not, can remain on a consumer's credit reports for
up to seven years. The time limit is based on the date of the original
delinquency (i.e. when the debtor missed a payment and never again became
current), not the date of the
last activity. Thus, post-charge-off payments should not "re-start the clock.”
Some
debtors may be able to negotiate with the creditor to have the item removed
from the consumer's credit reports in exchange for partial or full payment.
This must be done directly with the creditor, not with an outside collection agency. The chances of success may
depend on the amount of the debt and settlement offered, the age of the item,
and the particular creditor's policies. If you attempt this, do everything in
writing (keeping copies), and be sure that the individual you are dealing with
has the authority to grant your request. Remember that your payment is your leverage,
and get a clear, valid, written agreement before you pay. If you have already
paid without a written agreement, then the creditor will have no motivation to do you any favors.
If
you have any charge-offs on your credit reports, your ability to obtain
credit will be seriously impaired, and you must actively work to achieve personal credit repair.
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