Advice on Charge Offs and Settlement

“Charge off” is an accounting term used by creditors, meaning that a creditor has transferred an account from its “accounts receivable” ledger to its “bad debt” line on its general ledger. Credit issuers are required to do this by the federal Office of the Comptroller of Currency, in an attempt to prevent banks from inflating future earnings statements with old and defaulted accounts. For the consumer, the only real consequence of an account charging off is that the account will report as a negative item (R9) on the consumers’ credit reports.

Charge off does not mean the consumer no longer owes the debt. Charge off does not change the legal status of the debt. Despite what it sounds like, an account being charged off does not forgive the consumer for liability for the debt in question. Creditors can continue their collection efforts to secure payment on charged off accounts. Creditors may continue to charge interest on charged-off accounts. Settling an account with a creditor will not result in the account being charged off. In all likelihood, if the creditor is offering to settle, the account has already been charged off due to its delinquency.

Credit Score & Delinquent Debt

Resolving the charged off account appearing on your credit report should have a positive impact on your credit rating. The past delinquency will not be removed from your credit report, but it should reflect a $0 balance on this debt. While the past delinquency and charge off will continue to negatively impact your credit rating, the impact should be much less if you pay the outstanding balance. Resolving this account should remove an outstanding balance from your credit profile, and it will reduce your “debt to available credit ratio,” which should also have a positive impact on your credit rating.

Because I do not know the other details of your credit history, I cannot tell you how much resolving this debt will improve your credit score—the increase in your credit rating may be quite large or very small depending on how many other accounts and other factors are currently being reported on your credit file. For more information about credit, credit reports, and credit scoring, I encourage you to visit the Bills.com Credit page.

Negotiating a Debt Settlement

You may have noticed that I have used the word “resolve” rather than “pay” thus far in responding to your question. The reason I do not like to speak of “paying off” the account is that it implies paying the full balance of the debt. As you have already seen, many creditors will agree to reduced balance settlements on delinquent accounts such as yours. For example, if you contact the creditor and explain that you would like to settle this account, the creditor may be willing to accept a reduced-rate settlement to fully resolve your outstanding debt. In many cases, I have seen creditors accept as little as 30% to 50% of the balance owed to resolve the outstanding debt. Generally speaking, creditors will require any settlement offer to be paid in a single, lump sum payment, though some creditors may allow you to pay a settlement over the course of a few months.

If you are able to negotiate a settlement with the creditor, I strongly encourage you to obtain a written settlement offer from the creditor prior to tendering payment. If you choose to settle this account, your credit reports may list an account status of “settled in full,” “settled as agreed,” or “settled for less than full balance.” These account statuses are not considered as positive as a “paid in full” status, but the difference is generally negligible, especially considering the amount of money you may be able to save by settling the debt.

If you would like to read more about debt, and the options available to consumers who are struggling to pay their bills, I encourage you to visit the Bills.com Debt Help page.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com