A charge-off or chargeoff is a declaration by a creditor (usually a credit card account) that an amount of debt is unlikely to be collected. This occurs when a consumer becomes severely delinquent on a debt. Traditionally, creditors make this declaration at the point of six months without payment. A charge-off is a form of write-off.
While a charge-off is considered to be "written off as uncollectable" by the lender, the debt is still legally valid and remains so after the fact. [1] The creditor has the right to legally collect the full amount for the time period permitted by the statute of limitations applicable to the location of the financial institution and the consumer's residence. [2] Depending on the location, this period may be a certain number of years (e.g. three to seven years) or, in some places, indefinite. [3] Methods of collection that can be used include contacts from internal collections staff, outside collection agencies, arbitration, or a lawsuit. [4]
In the United States, federal regulations require creditors to charge off installment loans after 120 days of delinquency, while revolving credit accounts must be charged-off after 180 days. [5]
The purpose of making such a declaration is to help support a tax deduction for bad debts under Section 166 of the Internal Revenue Code. In that respect it is a form of write-off. Bad debts and even fraud are simply part of the cost of doing business. The charge-off, though, does not free the debtor of having to pay the debt.
A charge-off is one of the most adverse factors that can be listed on a credit report. [6] It will then be listed as such on the debtor's credit bureau reports (Equifax, for instance, lists "R9" in the "status" column to denote a charge-off.) The item will include relevant dates, and the amount of the bad debt. [7] This may make obtaining any unsecured or even secured credit more difficult.
If the charge-off has been paid in full, it will be listed on the credit report as "paid in full". If settled for less than the amount due, it will be listed as "settled". Even such a listing on a credit report can be negative. [8]
As the number of charge-offs climbs or becomes erratic, officials from the bank's regulators take a close look at the finances of the bank. [9] They may impose various operating restrictions on the bank, such as stricter capital requirements or intensified supervisory examination programs. [10] In the most extreme cases, where credit quality declines and capital adequacy is compromised, regulators may close the bank entirely to protect the financial system. [11]
A write-off does not necessarily represent a legal discharge of the debt.
An accounting write-off does not inherently satisfy the legal requirement for debt release.
Legal liability remains unless specifically discharged. Limitation periods vary by state.
Creditors pursue recovery post-charge-off through internal efforts, third parties, or judicial enforcement.
Heightened credit risk considerations require institutions to address capital and liquidity rules. Regulators weigh in on scalability and risk thresholds to ensure issuers maintain adequate asset reserves.
Supervisory intensity will increase for banks with poor SREP outcomes. This leads to earlier on-site examinations, tighter remediation deadlines, and faster escalation including binding enforcement.
Material control failures and the inability to determine adequate expected credit loss (ECL) allowances can result in reputational, regulatory, and financial damage, potentially leading to the point of non-viability.