What Is a Loan Charge Off?

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Confusion over the meaning of a loan charge off can lead to financial problems if you unknowingly take the wrong course of action. Know the facts before ignoring a loan that might be charged off.

Banking Term

Debt Help explains that a bank charges off a loan by taking it from its assets column and listing it as a loss on their tax return. They do this when they come to the conclusion that the loan will not be paid, usually six months after the last payment was made.

Credit Rating

A loan charge off is one of the worst marks that can be on a credit report. It shows that, in the end, you did not meet your obligation to pay the debt.

Disposition

A loan charge off is not a forgiven loan, according to Debt Help, and finance companies will continue to try to collect the full amount if possible.

Collection Agencies

Often, a loan company will sell the debt to a third-party credit agency. You are still responsible to pay the debt.

Paying a Charged Off Loan

It is to your advantage to pay off a charged off loan, advises Bankrate’s Debt Adviser Steve Bucci. Contact the original finance company and make arrangements to pay off the debt to them or the company that bought the loan and have its status changed to “paid charge off” by the credit bureaus.

When Not to Pay

According to MSN Money’s Liz Pullman Weston, there may be times when it's detrimental to pay on your charged off loans. One is when you try to settle for a lesser amount. Another is paying after the statute of limitations is over.