I have had $125k in an unsecured line of credit for over 10 yrs. Zero problems with loan or credit, and I have never been late on any loan. They called the note due without warning. While making $1k/month payments, they charged the loan off (about 6 months ago). They are willing to take a lump sum settlement but my credit already shows the charge off. Can/Should I request that they remove this from my record as part of the settlement? What is the best thing, credit score wise, to do at this point? Thanks!
Thank you for your question about credit card charge off and your unsecured line of credit.
You are correct to deal with both aspects of your problem, settling the debt and repairing your credit score. Your best course of action is to settle the debt and work on improving your credit. Accurate negative accounts, such as charge-offs cannot just be removed from your account, but remain on your credit report for 7 years from the time of your first date of delinquency. However, by creating good credit habits, you can rebuild your credit score.
Before dealing with your credit score and debt settlement approach, let us first look at how you got into your present situation. A lender offered you unsecured lines of credit against your personal guarantee and did not require additional collateral. The lender looked at your income, assets, debt-to-income ratio, and credit history, in order to qualify you for an unsecured line of credit.
Any credit that you take includes a contractual agreement between yourself and the lender. The agreement includes the sums of money available, the fees, the interest rate, the term or length of the loan, and the repayment terms, including principal and interest payments.
An installment loan, such as an auto loan or a mortgage, will clearly spell out all of those features. A balloon loan, or an interest only payment loan, calls for a large principal payment at the end of a specific loan period, and is confusing to many consumers. It is much more difficult to plan to meet the required lump-sum balloon payment, unless you have a specific asset to sell. Oftentimes people take an interest only mortgage, with the intent to sell the property and pay off the loan. Many people have found out just how risky that this can be in a market with declining prices.
An unsecured line of credit is generally less clear to the borrower than the balloon payment loan, for two main reasons:
An unsecured line of credit is a common type of credit. Most credit cards are unsecured lines of credit. They involve a contractual agreement that spells out the maximum amount of money available to you, the required minimum payments, interest rates, and fees. The credit card can continue without change, until the lender decides to suddenly lower the credit line available, increase the interest rate, or cancel the card. This change is generally done according to rights the lender has that were specified in the print in the agreement you signed.
Other types of unsecured personal debt are an unsecured personal line of credit or an unsecured business line of credit. When taking out this type of loan or credit, keep tabs of the amount you owe, and the time that you might have to repay the loan. The creditor retains the right to cut the line of credit or call for payment in full. If this happens, you will have to find alternative sources of funds to meet your obligations. If you do not make the proper arrangements, the lender will charge high fees, raise your interest rates, and even proceed to take legal action, if no solution is worked out.
As occurred in your case, if an unsecured line of credit is called in and you default, then the creditor will begin collection actions. This generally means a lawsuit against you, where the lender will seek a court judgment. A judgment can lead to wage garnishment, bank levies, and liens on your personal property.
A charge off means that the creditor, for accounting purposes, is writing off the unsecured line of credit as a bad loan. It does not mean that the creditor will stop trying to collect on the debt. A charge off does not determine the amount of time left for the statute of limitations (SOL). The SOL generally begins at the time that the debt first went delinquent.
For more information about these topics, see the Bills.com articles about:
You have taken the correct initial step, by being proactive about working out a solution for your debt. Negotiating a settlement with the lender is one tactic to use, and most likely a necessary one, from your point of view, if you have a significant income and/or assets.
You are correct in wanting to repair the damage done to your credit score. The default on the unsecured line of credit damaged your credit score. Remember to monitor your credit score periodically.
The main component of the credit score is your payment history, whether or not you make your payments on time. Any time you pay late or do not pay enough to meet your required monthly minimum payment, you damage your credit score.
Remember, accurate information remains on your credit report for a time period set by law, and cannot just be removed magically if the information is not to your liking. Beware of collection agencies that demand payment for accounts that you really do not owe. Learn to dispute those items and dont fall prey to scams that will negotiate a payment in exchange for deleting the information from your credit report.
I hope this information helps you Find. Learn & Save.