The charge-off date is the date on which a creditor writes an uncollectible debt off its books. The charge-off date falls 180 days after the last payment made by a delinquent debtor. At that point, the creditor has determined that it will no longer receive any payment from the debtor. A charged-off account is forwarded to a collection agency or third-party debt collector for additional collection attempts. Charged-off accounts are severely delinquent and can be damaging to a debtor’s credit report.
When a creditor charges an account off, it is reported to the credit reporting agencies as a bad debt. The account will be rated as “9”, which is the code or designation for charge off. If the account is an installment loan such as an automobile loan, the rating will be, “I-9. The “I” stands for installment. Revolving accounts such as credit card accounts are rated as, “R-9”. This information may not show up on the records of all three credit reporting agencies.
Charge-off accounts will remain on a debtor’s credit file for approximately seven years. After this time, they are supposed to be removed from a credit file automatically. Accounts that are not removed can be disputed with the credit reporting agency in writing. Charge-offs can lower a credit score significantly, making it difficult to receive credit in the future. The longer a charge-off remains on a credit file, the less damaging it becomes to the credit file.
When collection agencies receive charged-off accounts, they can pursue legal action through the courts and receive a judgment. A collection agency can get a bank levy or wage garnishment or even place a lien on any real estate owned by the debtor. These practices can vary from state to state. Bank levies allow collection agencies to take money from a debtor's bank account, and wage garnishments allow them to take a portion of the debtor’s income from each paycheck.
Statute Of Limitations
A collection agency can continue to collect on an outstanding debt indefinitely. However, it cannot pursue legal action beyond the statute of limitations. Each state has its own time frame for the statute of limitations, which also depends on the type of debt. The primary types of debts are oral contracts, written contracts, promissory notes and open-end accounts. After the statute of limitations has passed, collection activities are limited to phone calls and written correspondence.
When a debtor pays off a bad debt account, it remains on his credit file until the seven-year time frame has passed. The account is then rated as a paid charge-off.
Corporations use charge-offs and bad debts as write-off expenses for taxes when they file their profit and loss statements. Tax deductions are received when the taxes for an organization are filed each year.