Deep Dive: Charge Offs & Profit and Loss

I’ve received a lot of questions recently about charged off accounts and what they mean to the consumer. Today, we’ll take a deep dive into what a charge off is, how it impacts your client, and what to do about it.

#1. What is a Charge Off/Profit and Loss Account

A Charged Off or Profit Loss account happens when a bank or lending institution decides that the consumer is no longer likely to repay the debt on time or in full. Banks then label the account as a charge off and receive a tax deduction for writing off the bad debt.

#2. Does my client still owe the money if it is a Charge Off?

Yes. The IRS allows banks to amend their taxes for up to 7 years from the date it charged off if they are able to collect on the debt. Even though some charge off accounts don’t have to be resolved in order to qualify, they still have a dramatic impact on a client’s credit score.

#3. What happens if my client settles a Charge Off?

When a client pays a charge off account they may still be liable for the remaining balance via a 1099-C from the IRS. This means that your client may be responsible for reporting the deficiency balance as income. So, depending on the size of the debt and how much was negotiated, the client could be impacted on their taxes in addition to paying the settlement. In addition, charge off accounts are not automatically deleted from credit upon payment.

#4. FCRA Violations with Charge Off Accounts.

Unfortunately, many charge off accounts are manipulated to stay on credit beyond the seven year statute of limitations. This happens because banks often update the DLA when a payment is made, or an asset is sold that was tied to the charge off. The average charge off account stays on credit for approximately 15 years due to these violations. In addition, all collections originating from a charged off debt are supposed to be accountable to the seven year federal statute of limitations, but are often manipulated to stay on credit even though the original date of first delinquency has expired.

Charge Off or Profit and Loss accounts can be difficult to navigate and often cause harm to a consumer’s credit profile. Understanding when it is appropriate to resolve a charge off is important. One key piece of advice is to identify the account type of the original charge off. If it is an INSTALLMENT loan, there may be little incentive to resolving that account (especially if it is older than 3 years). However, if it is a REVOLVING account, the balance reporting on the closed account is still impacting the client’s overall utilization ratios that could be dramatically hindering their credit scores. REVOLVING charge off accounts should be looked at seriously as they could positively impact your client’s credit score if they are resolved and paid.

We hope this information was beneficial. If you have questions or would like to discuss further, please don’t hesitate to let us know!