Bankruptcy - The X-Credit Files & Charge Offs

Raymond Labella
May 20, 2009 — 1,701 views  
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You fall past due on your credit cards, and the bill collectors start calling. They call every week, every day, sometimes every hour...then all the sudden it all stops. The phone goes quiet for months, sometimes years. It's like everyone has forgotten about the debt. They haven't, but it may seem that way. You have just entered the charge-off zone.

My name is Ray LaBella and I am a Bankruptcy attorney. Charge offs are something that very few people really understand well. It's kind of like your debt went into a coma. It's not dead, it's not sleeping, so it must be alive - just dormant for a while.

Bill Collectors will tell you that a charge off means that the account gets turned over to a collection agency. The credit bureaus view charge offs as a "bad debt," meaning the debtor hasn't paid as agreed. Most debtors think that charge off means that the creditor has just given up. Ironically all of those answers are both partly right and partly wrong.

Charge off is an accounting term that describes a specific bookkeeping event. Companies that allow customers to pay over time (like lending companies) can include accounts of customers that will be paying as an asset to their business. However, when collection of that account becomes doubtful, the company can no longer include that account in its balance sheet as an asset. It must be written off as an asset and expensed away. The company takes the now bad debt and takes a charge against its revenue to reflect the loss. This is called charging off the account. It specifically describes the accounting treatment of the debt.

Before the account is charged off, many national lenders (like banks and credit card companies) will employ bill collectors to attempt to collect on these debts so that they do not have to charge them off and take the loss. So to the in-house bill collector, charge off means that the account goes out to a collection agency or collection attorney. But, the only thing that actually happens is that the company has decided that its chances of collecting the debt are so remote that they no longer want to pay in-house employees to try to collect it. They would rather pass the account to a collection agency who will only get paid if it actually collects something or over to a collection attorney who usually gets paid the same way.

Meanwhile, the lender notifies the credit bureau that it is charging off the account and stops reporting that trade line to the credit bureau. Once the account is charged off, the lender will not update the account status again until the debt has been paid in full or settled completely.

Sometimes charged off debts are bundled together and sold to companies that buy these debts at a discount because their collection is so doubtful. These debt buyers actually now own the debt that the debtor owed to the lender, so they step into the shoes of the lender. They can collect on the debt in their own name or even sue in their own name. Sometimes, debt buyers will even continue to report the account to the credit bureau.

Whether the lender is going to send the account to a collection agency, an attorney, or bundle and sell it to a debt buyer, this process takes time. This period is that silent period between phone calls. It could be a couple weeks or a couple years. The statute of limitations on accounts in Florida is 4 years, but debts supported by a contract (written, oral, or mixed) is 5 years. The owner of the debt has that long to collect on the debt or file a lawsuit.

So, while the lender may give up collecting the debt themselves, it does not mean that the debt has gone away. Do not confuse charge off with forgiveness. Forgiveness of debt means that the debtor has been forgiven and the creditor is completely abandoning its right to pursue collection. This is extremely rare and there is a catch. Even assuming that a debtor can obtain forgiveness of a debt, the IRS steps in and requires the debtor to declare that forgiveness as income, just like wages. So, if you do find yourself in this position, be sure to not only talk to your attorney, but also your tax accountant.

I hope you find this information helpful, and remember I am pulling for you. We're all in this together. You can call or visit us at our website at

About the Author

Mr. LaBella practices Law in the areas of Consumer and Small Business Bankruptcy, Probate, Asset Conservation and Estate Planning. He is also a proud member of the following organizations: The Florida Bar, Jacksonville Bar Association; Jacksonville Bankruptcy Bar Association; National Association of Consumer Bankruptcy Attorneys.

Raymond Labella