What Is A Charge Off And How Is It Different From A Collection?

What Is A Charge Off And How Is It Different From A Collection?

Ever wonder why some accounts are listed as a charge off and others as collections? Most accounts listed as a “charge off” are associated with accounts such as revolving lines of credit (i.e. credit cards) or installment loans (i.e. auto loans). A creditor will likely change the reporting status to Charge Off after you’ve gone delinquent on payments for longer than six months.

Once an account is in a charge off status, the creditor then has options. If the creditor keeps the account, they can “write off” the bad debt on their taxes, but still continue their efforts to collect upon the debt for up to seven years from the date of first delinquency. If they are unable to recoup their losses within that period of time, they have the right to send you a 1099-C “Cancellation of Debt” for the debt that is then added to your tax burden as income.

If the creditor decides to sell the debt to a collection agency, the charge off will be set to a zero balance and the collection agency then has the ability to report the account as a collection. As a collection, the account can remain on your credit report for seven years from the date of last activity. Unfortunately, the original charge off can still stay on credit (with a zero balance) while the collection agency can report the account as a new collection.

Both collections and charge offs negatively impact the overall health of your credit profile. If you have collections or charge offs holding you back from reaching your credit goals, it may be worth scheduling your Free Credit Evaluation. Unfortunately, an alarmingly high number of charge offs and collections report in violation of the FCRA and FDCPA, leading to the unfair representation of your credit risk as a consumer.

Learn more about a Free Credit Evaluation at www.premiercredco.com/services.