Profit and Loss Charge Offs - What Does This Mean?

Profit and Loss Charge-Offs - What Does This Mean on Your Report?

Last Updated: June 3, 2011

Many people mistakenly think when a debt has been charged-off that it's been cancelled by the creditor. This is not true. You are still responsible for paying off the debt. Companies, including creditors and lenders, have profits and losses every year. They make money from profits and lose money from losses. When a creditor charges-off your account, it's declaring your debt as a loss for the company.

Is a Charge-Off Bad?

Even if these companies aren't actively trying to collect from you, these debts are still owed by you to the company. If you refinance your house or apply for a loan, most mortgage companies will make you pay off these debts. The reason is that these debts can be turned into a lien against your property. Liens matter to a mortgage company for a couple of reasons:

When you sell your home, the monies owed against a lien (plus interest) must be paid off to clear your title.
Liens are in a higher position than a mortgage, meaning they get paid off before the mortgage company gets its money. If the mortgage company has to foreclose and you have lots of liens on your home plus a mortgage, the mortgage company potentially could lose thousands of dollars.
Just because these debts are charged off doesn't mean that the creditor won't come after you later. Creditors have the right to sue you and win a judgment in court until the statute of limitations runs out.

However, if you're never going to buy a home, or at least not for 7 more years (that's when the profit and losses will drop off your credit report), it won't affect you, except for having bad credit. If you buy a car, you won't be asked to pay these debts off, or any thing other than real estate. Again, charge offs are almost as bad as having a bankruptcy, plus you still owe the money.

How to Remove a Charge-Off

Future creditors and lenders take charge-offs seriously, so it�s in your best interest to remove charge-offs from your credit report. Negotiation is your best tactic for reducing the effects of a charged-off account.

Talk to the Creditor - To remove a charge-off, you should contact the original creditor NOT the debt collector. You want to convince the creditor to remove the charge-off from your credit report in exchange for payment.
Get the Agreement in Writing - When the creditor agrees to remove the charge-off from your credit report, get the agreement in writing. Either on company letterhead with the all the info of the agreement on it as well as the person you make the agreement with. Or, you can send them a letter with all the terms of the agreement on it. Do not mail payment until the agreement is signed by you and the representative for the creditor.
If There is No Agreement - If you and the creditor can not come to an agreement, just wait out the 7 years and it will come off. Or you can file bankruptcy.

Bankruptcy, although not to be undertaken lightly, is not a terrible option if your debts are out of control. If you keep your credit clean and open three new charge accounts (even gas cards), you can get an A paper (the best rates and terms) loan in 2 years. See our bankruptcy FAQ sheet for more information.