Profit and Loss Charge-Offs on Your Credit Report
Last Updated: March 18, 2017
Many people erroneously think when a debt has been charged-off, that it's been cancelled by the creditor. We hate to be the ones to break it to you but this is not true and you are still responsible for paying off the debt. Companies, including creditors and lenders, have profits and losses every year and they make money from profits and lose money from losses. When a creditor charges-off your account, it's declaring your debt as a loss for the company.
The term charge-off is used in the accounting of assets for a particular company, i.e. the credit card company. A bank initially considers your debt to be an asset but if you fall behind on your payments, now this asset becomes a liability. So, what the bank will do then is charge-off part or all of your loan from its books.
When this happens, a report goes out to the credit bureaus which then gets incorporated into your credit history and then into your credit score. A loan marked as a charge-off will hurt your credit score and will remain on your credit report for seven years.
Even if these companies aren't actively trying to collect from you, these debts are still owed by you to the company. If you refinance your house or apply for a loan, most mortgage companies will make you pay off these debts. The reason is that these debts can be turned into a lien against your property. Liens matter to a mortgage company for a couple of reasons:
- When you sell your home, the monies owed against a lien (plus interest) must be paid off to clear your title.
- Liens are in a higher position than a mortgage, meaning they get paid off before the mortgage company gets its money. If the mortgage company has to foreclose and you have lots of liens on your home plus a mortgage, the mortgage company potentially could lose thousands of dollars.
- Just because these debts are charged off doesn't mean that the creditor won't come after you later. Creditors have the right to sue you and win a judgment in court until the statute of limitations runs out.
However, if you're never going to buy a home, or at least not for 7 more years (that's when the profit and losses will drop off your credit report), it won't affect you, except for having bad credit. If you buy a car, you won't be asked to pay these debts off, or any thing other than real estate. Again, charge offs are almost as bad as having a bankruptcy, plus you still owe the money.
Future creditors and lenders take charge-offs seriously, so it's in your best interest to remove charge-offs from your credit report. Debt negotiation is your best tactic for reducing the effects of a charged-off account.
- Talk to the Creditor. To remove a charge-off, you should contact the original creditor NOT the debt collector. You want to convince the creditor to remove the charge-off from your credit report in exchange for payment.
- Get the Agreement in Writing. When the creditor agrees to remove the charge-off from your credit report, get the agreement in writing. Either on company letterhead with the all the info of the agreement on it as well as the person you make the agreement with. Or, you can send them a letter with all the terms of the agreement on it. Do not mail payment until the agreement is signed by you and the representative for the creditor.
- What if There is No Agreement. If you and the creditor can not come to an agreement, just wait out the 7 years and it will come off or you can file for bankruptcy.
Bankruptcy, although not to be undertaken lightly, is not a terrible option if your debts are out of control. If you keep your credit clean and open three new charge accounts (even gas cards), you can get an A paper (the best rates and terms) loan in 2 years. See our bankruptcy FAQ's for more information.
Clear away charge offs from credit score legally
A charge off can be a debt that’s severely delinquent, where the creditor claims which it has turn out to be un-collectable. The account is closed and not active once it’s declared a charge off. The creditor at this point is able to write the amount off as a loss on their ledgers, however it remains on your credit report up to seven years. No matter how old the charge off is, you can work to legally have it removed from your credit report for 10 cents on the dollar.
Regardless of the reality that the debt continues to be classified as a charge offs the creditor is still interested in collecting what’s owed. Generally, they are willing settle for pennies on the dollar at that point. To be able to have charge offs taken off your credit report, you initial require to order copies of all three credit reports. Then, identify the accounts which are indexed by charge off status.
Notify every creditor and ask if they’re ready to take away the item off your credit score in exchange for a reduced cash settlement on the debt. Should you get a solid do it yourself credit repair system, you will have the tools available to word the letters correctly and negotiate a settlement amount.
A record range of charge offs have been reported to be removed within the past eighteen months as creditors have experienced a rise in delinquencies and poor debts. The key would be to know what you are doing when you send them the letter. As an example, if your letter just isn’t worded properly, you may wind up paying for the debt, but not being able to get them to remove the charge off from your credit report. The difference between a well-worded letter along with a poorly worded 1 is subtle, but a credit repair system that’s written by business experts will make certain that you will be productive.
If you’re wondering if it’s worth the time and effort to repair your credit contemplate this: 2 charge offs can simply reduce your credit score by 190 points! Taking the time to repair your credit report is minimal compared to the cash you’ll save on future interest fees. In addition, removing charge offs will enable you to obtain that new vehicle or credit card you desperately want. Take time to repair your credit so it is possible to gain financial freedom!
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Writing Off or "Charging Off" Your Second Mortgage & Putting it into Bankruptcy
Every expert says the same thing. A “charge off” is the same as a “write off” and is merely an accounting term used in financial processes. The term is used when a financial institution takes an account from a ledger and posts it to that financial company’s “unable to collect” ledger. The lien from the mortgage still exists on the property owner / debtor’s credit report. The monies owed at the time of the “charge off” are still owed. The financial company is simply waiting to decide its next move. It is simply not going to continue trying to collect on a loan that the debtor is unwilling or unable to pay. The fallacy believed by too many debtors is that they no longer owe anything on this “charged off” mortgage. On the contrary, that mortgage company is just standing still, waiting low. The company knows the financial conditions of the debtor and the primary mortgage. The company does not want to foreclose because, as is likely, the primary will get all of the monies from the sale, leaving nothing for this company. So, again, they do not want to force foreclosure. If they get tired of holding this uncollectable debt, they may sell it off to a collection agency. At that point, this original financial institution no longer cares. By law, they have to remove their lien within sixty days or face being sued by the debtor.
If in ignorance and mistaken belief the debtor files for bankruptcy, Chapter 7 will exempt secured loans, which is what mortgages are, from discharge. That means that the debtor will still owe the mortgaged amounts, no relief, unless the debtor abandons the property. State laws can add to Federal bankruptcy law, but cannot supersede it, and, as we all know, state laws differ from state to state. So, a good, knowledgeable lawyer is essential. Some people “reaffirm” a mortgage loan in Chapter 7. Usually, this has no bearing. Secured loans are exempt from discharge, as stated above.
Experts and lawyers direct debtors in this situation into Chapter 13, where the court assigned trustee can negotiate and restructure the debt into something that is likely grudgingly acceptable by debtor and creditors alike. In Chapter 13, secured debt such as mortgage loans are subject to the negotiations to restructure the debt. Such negotiations will likely get the second mortgage lending company something more than what they would have gotten at a foreclosure, but maybe not as much as selling it to a collection agency. It does not matter to the debtor who is trusting to get a result that relieves the burden into something manageable.
One activity that debtors seem to not try is to personally try to reach an agreeable settlement with this second mortgage company. Nothing ventured is nothing gained, as the saying goes. Experts agree to start somewhat low, say at 10 percent of what is owed. If, and when, an agreement is reached, get it in writing. You may want to have a lawyer review the agreement before you sign. Reaching an agreement leaves all bridges intact, in the (unlikely) event that you engage this same company later on.