Advice on Charge Offs and Settlement

Advice on Charge Offs and Settlement
Mark CappelJun 16, 2014
Key Takeaways:
  • Charge off is an accounting action that does not change the legal status of a debt.
  • Charge off does not mean the debt is forgiven or canceled.
  • Charge off will harm a credit score.
Can I Settle a Debt Before a Creditor Charges It Off?

Are charge-offs when a creditor wants to settle the debt by offering me to pay half the debt? Is this a good thing or will it look bad on my credit report? Can I settle a debt before a creditor charges it off?

You can negotiate a settlement to a credit card debt before the credit card issuer moves the debt to a charge-off status.

According to a large debt settlement provider Bills.com contacts, about one in five settlements the company negotiates occur before the account is charged off.

Some big names in consumer lending are willing to negotiate pre-charge-off account settlements too, including:

  • Wells Fargo
  • Capital One
  • Discover
  • PNC Bank
  • Comenity Bank
  • BB&T
  • USAA

Let’s look at charge-off and what it means, how a charge-off harms your credit score, and the informal rules for negotiating a pre-charge-off settlement.

What is a Charge-Off?

Charge-off is an accounting term used by creditors that means a creditor transferred an account from its "accounts receivable" ledger to its general ledger’s "bad debt" line. Credit issuers are required to do this by federal rules and guidelines in an attempt to prevent banks and other lenders from inflating future earnings numbers by including defaulted accounts.

The main consequence of an account charging off is the account will appear as a negative item (R9) on your credit reports.

Charge off does not change the legal status of the debt. After an original creditor places a debt in charge-off status:

  • You still owe the debt
  • Your debt is not cancelled
  • Your debt is not forgiven
  • You are still liable for the debt
  • Your creditor may continue to collect on the debt
  • Your creditor may sell the debt to a collection agent
  • The original creditor may continue to charge interest on the account

If you need help with settling old accounts, get a no-cost debt settlement savings quote.

Credit Score & Delinquent Debt

If you pay-off or settle a charged-off account your FICO credit score won't improve. The notation that the account was charged off will remain. However, VantageScore treats resolved debts differently. VantageScore ignores resolved accounts, so you VantageScore credit score will improve once the debt is at $0 balance.

Negotiating a Debt Settlement

Most creditors will agree to reduced balance settlements on delinquent accounts, at some point in the collection process. For example, if you contact a creditor and explain you would like to settle this account, the creditor may accept a reduced-rate settlement to resolve your outstanding debt and put an end to their collections.

Creditors often require a settlement offer to be paid in a single, lump-sum payment, though some may allow you to pay a settlement over a few months. Don't hesitate to ask for a settlement in payments when negotiating with your creditor.

"Some lenders start the litigation process sooner, when the balance is higher," said a debt negotiator at a large debt settlement provider Bills.com contacted. "One example is One Main Financial. It sends Summons and Complaints to the delinquent accounts prior to charge off and collection placement." A high balance is $20,000 or more, though this varies by creditor.

Always get a written settlement offer from the creditor before sending a payment. The offer should state that the account will be brought to a $0 balance and the matter closed, if you make the agreed payment.

You need to protection of a written offer so the creditor can't claim that what you sent was only a payment and that you still owe the remaining balance. If the creditor won't send a written settlement offer, don't send any money.

If you choose to settle an account, your credit reports may list an account status of:

  • "settled in full,"
  • "settled as agreed,"
  • "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.

Pre-Charge-Off Settlement

Settling an account before it charges off is a good solution for both you and the creditor. It’s good for the creditor because it gets the account resolved with a lower loss than setting the account to a collection agent. It’s good for the consumer because he or she avoids collection calls, a possible lawsuit, judgment, and everything that can follow a judgment such as wage garnishment.

Struggling with debt? Contact one of Bills.com’s pre-screened debt providers for a free, no-hassle debt relief quote.

When will a creditor consider a debt settlement before charge-off? According to a large debt settlement company source, creditors are most open to a pre-charge-off settlement when the consumer can demonstrate a hardship. Most creditors accept the following events as hardships:

  • Loss of employment
  • Marital separation
  • Medical expenses

You do not necessarily need to show a hardship to negotiate a settlement, but it increases the chances the creditor will settle. If you have a legitimate hardship, share that reason with your creditor and be prepared to send proof of your hardship.

Typical pre-charge-off settlements amount to about 50 cents on the dollar, which is right in the center of the typical debt settlement range from 40 to 60 cents on the dollar.

You can negotiate a settlement yourself, or hire a reliable debt settlement company to do the heavy lifting for you.

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

Best,

Bill

Bills.com

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10 Comments

SSean Fogarty, Sep, 2020

I’m currently negotiating a second mortgage charge off. I made an offer of 5% and the returned at 75% . Is this a good sign that they are willing to negotiate?

DDaniel Cohen, Sep, 2020

Sean, they responded to your offer with a counter offer, so the negoatiations have already begun.

What is the date of the last payment you made on this loan? In what state do you live? I recommend seeing if the statute of limitations on debt in your state is in play. If you have no legal obligation to pay them, until you go to sell the home, refinance the first mortgage, or borrow against equity you may have that would strengthen your negotiating position.

SSue, Apr, 2012
I had a Cap 1 account that was current when I received correspondence from them, telling me I did not have to pay the debt if I didn't want to and it would be written off. The next month I didn't pay and they wrote it off. I checked my credit report 2 years later, and they reported it as a "settled for less than the full balance", a key derogatory. Recently, I paid the balance due, not because I legally had to, but because I wanted my creditors to see I paid my bills in full. If I had known it would be a key derogatory, I wouldn't have accepted the settlement. They haven't reported my new status (account paid in full) yet, and when I called the dispute department, the lady was confused and said she had to research this, as I have no late payments before this settlement. Usually, they don't report "paid chargeoff" unless it's been late at least 120 days. Does anyone have any advice as how this should be reported? I'm trying to get it reported as "Paid in full" or deleted entirely. Any advice is appreciated.
BBill, Apr, 2012
Your best bet is to continue to work with Capital One to set an accurate status for this account. Readers? We welcome your constructive ideas.
BBailey, Mar, 2012
Debt was originally Citibank credit card. I have been unemployed for 3 years and made minimum payments until May 2011 at which point Citi doubled the minimum and would not negotiate. In Oct/11 I recd notification from Citi that it would go to collection by Nov 9 but when I called to make arrangements for payment on Nov 7 they had already sent it to collections. And thus the games ensued...CA has sent a summons, there is a charge off on my CR in the name of Citi. Summons says that CA is acting for Citi but I'm inclined to believe that this debt has been sold. I requested debt validation and as of yesterday received photocopies of my Citi bills. Does this confirm that Citi still owns the debt or should dig deeper?? Thanks
BBill, Apr, 2012
If you have received a summons, and the collection agency has sent proof of the debt, then you should be prepared to either immediately negotiate a settlement or go to court.
BBailey, Apr, 2012
Perhaps I should elaborate. CA/law firm is Cohen and Slamowitz and they seem to have quite a reputation for their unethical tactics. (and pending class actions against them) The process server perjured himself on the Affidavit of Service, left the summons in the snow on my driveway, dollar amount on summons does not match statements and recently another CA has started calling. I would hate to make arrangements to settle with the wrong CA. Thanks for your help.
BBill, Apr, 2012
The legal process works fairly when everyone plays by the rules. When a consumer faces a collection agent that may or may not be playing fairly, it is time to level the playing field. Consult with a lawyer who has consumer law experience. This has four advantages: 1. You will know your rights and liabilities under state and federal law 2. Your advocate will fights for your rights against an opponent that may not be following the rules. 3. Your opponent will know it cannot bully you. 4. If your opponent does not follow the rules, your lawyer knows what steps you can take to get the appropriate sanctions.

My advice? Consult with a lawyer immediately.

SSam, Apr, 2012
Bailey, check the rules, if it is not proper service then go for motion to dismiss with reason of not proper service and then try to settle with them