How to Handle Charge-offs

A charge-off is an accounting term used for when a creditor writes off or charges-off a debt that they are unable to collect on. Creditors typically charge-off a debt if there is no payment on the account for more than 180 days.

A charge-off is an accounting procedure for tax purposes, used by the creditor, where an uncollected debt or charge-off is reported as a loss for the creditor. However, this does not mean the debt is forgiven.

Once a debt charges-off, the creditor usually will sell (typically for pennies on the dollar) or assign the debt to a collection agency to tempt the person into paying. Charge-offs will remain on your client’s credit report for 7 years.

Paying an old charge-off will not remove it from the credit report. Instead it will update the status to “paid charge-off” which is slightly better but still bad. The impact of paying off an old charge-off, can be devastating to a credit score.

It is much easier to get paid charge-off’s removed than unpaid charge-offs. There is no incentive for the creditor to fight the dispute, since they already have their money. So if you dispute the charge-off, on behalf of your client, with the credit bureau, the credit bureaus will send a verification request to the creditor. Most often the creditor will ignore the verification request.

Unpaid charge offs can be much harder to dispute and remove. Always try to dispute the charge-off with credit bureaus at first – often you can get the charge-off removed in the first round of dispute letters.

However, it is possible for the creditor to ignore a verification request if the person still owed them money. Nevertheless, it is still worth a shot to dispute it and see what happens.

Another way to remove an unpaid charge-off, on behalf of your client, is to contact the original creditor and arrange a payment plan – in exchange for them removing the charge off once it is paid. The success rate of this strategy is hit or miss, but it won’t hurt to ask how it can be resolved or removed.

Depending on the creditor, this can be a great way to get an instant increase to a credit score and permanently remove a derogatory item.

Creditors and collection agencies are well aware of the ramifications negative items have when reporting on a credit report, they understand the benefit to a consumer if an item was deleted rather than being marked “Paid Derogatory.” Due to the obvious benefits, collection agencies will take advantage of this opportunity to create additional revenue.

A collection agency will often offer a settlement for 20-40% of the original balance as a typical agreement; however, a “PFD” (Pay for Deletion) settlement will come at a much higher cost.

Collection agencies will typically demand between 60-100% of the debt to negotiate deletion of an account. This is a major benefit for the collection agency because they have not incurred any additional costs for this type of negotiation. Your client benefits, as well, due to the collection account being quickly deleted!

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