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Credit Card Charge-Off – What Does It Mean And What Should You Do About It?
By: Charles Phelan
Have you been told by a creditor that your debt is about to "charge-off"? Did
the bill collector make it sound like you will be ruined financially if you
allow this catastrophe to happen? If you're behind on your bills, unable to keep
up with payments on your credit cards and other debts, sooner or later you will
hear a creditor representative threaten you with the dreaded "charge-off." So
what is a charge-off anyway? Should you be worried? What are the consequences of
this mysterious event?
I'll start by explaining what a charge-off is NOT. Because the term includes the
word "charge," many people mistakenly think it has to do with cancellation of
the account by the creditor. In other words, you can't "charge" anything on your
credit card anymore. But it's not the same thing at all, and most banks will
revoke charging privileges around 2-3 months before the deadline we're talking
about here.
What banks and bill collectors call a "charge-off" is the point at which the
creditor writes off the account balance as a "bad debt." It usually happens
after six months of non-payment. After that, they no longer count it on their
books as an asset. You still owe the money, of course. And they will certainly
make continued attempts to collect it from you. But the creditor has been forced
by the rules of accounting to zero out the debt on their financial ledgers. For
causing this loss, they will punish you by placing a derogatory mark on your
credit report. A "charge-off" is a serious negative mark, to be sure, but it is
not the financial ruination that debt collectors would like to have you believe
it is.
Should charge-offs be avoided if possible? Certainly. Does the prospect of a
charge-off mean you should panic if you have no way to pay the bill? No! Is it
the end of the world if the account has already charged off? No! Too often, bill
collectors make a charge-off sound so bad, and they apply so much pressure, that
people cave in and make payment commitments they cannot keep. Collectors usually
demand payment via post-dated checks, and this frequently leads to bounced
checks and even worse financial problems. Most of us are brainwashed by the
banks and media on the subject of credit. Sure, good credit is important. But
committing to payments you really can't afford just to preserve your credit is
like watering the lawn while your house is burning down.
Here are a few simple rules to follow when trying to avoid a charge-off that
hasn't happened yet:
* Don’t be intimidated or threatened by pre-charge-off collection tactics. Keep
a cool head and don't take it personally when collectors try to get under your
skin.
* Call your creditor to find out the minimum payment necessary to avoid the
charge-off, and subsequent payments to keep the account current going forward.
Don't commit to this payment (or series of payments) unless you're sure you can
follow through.
* Negotiate a lump-sum settlement at 50% or less if you have the resources, or a
workout plan for monthly payments that you can live with.
* Do not allow bill collectors to talk you into using post-dated checks, or
providing your checking account details over the telephone. Instead, make
payments via cashier's check or money order.
* Do not make payments based on a verbal arrangement. Get the deal in writing
and signed by a creditor representative who has authority to approve the workout
plan.
What should you do if you simply don't have the money to rescue the account from
charge-off, or if the account has already been charged off by the creditor?
* Take a deep breath and relax; the sky won't fall on your head just because you
had a charge-off.
* Realize that you still have an opportunity to resolve the matter by dealing
with the original creditor or the collection agency assigned to the account.
* Negotiate a lump-sum settlement with the creditor or collection agency. Again,
aim for 50% or less, and ask for the charge-off to be deleted from your credit
report as a condition of the settlement. (Most creditors will not agree to this,
but it's worth asking anyway. Do be sure that they will update your credit
report to show that the matter has been resolved and the account has been
satisfied.)
* If you can't work out a deal with the collection agency assigned to your
account, then wait until it goes to another agency! Eventually, it will either
be assigned or sold to an outfit that you can deal with to get the matter
cleared up.
To sum up, a charge-off is not the end of the world. It should certainly be
avoided if possible, but not at the risk of making things worse by committing to
payments you're not sure you can keep up with. Just remember that the creditor
doesn't want to see a charge-off any more than you do, so use that knowledge to
your advantage in working out a mutually acceptable arrangement. Get everything
in writing, don't disclose your checking account details, and follow up to make
sure the creditor reports the matter correctly on your credit report. You'll
find that it's easier than you think to resolve a charge-off situation before it
happens, or clean it up if it's already taken place.
About the Author:
Charles J. Phelan has been helping people become debt-free without bankruptcy
since 1997. A former executive in the debt settlement industry, he teaches the
do-it-yourself method of debt negotiation. Audio-CD material plus expert
personal coaching helps consumers achieve professional results at a fraction of
the cost. http://www.zipdebt.com
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