Your Credit Report
Your credit report is a record of your payment history. Companies will use this record for the purpose of making credit decisions. The main part of the credit report is your credit score. In addition to your payment history, credit reporting agencies use the amount of debt you have, the number of accounts you have, past applications for credit and the age of your credit file for determining your credit score. The higher your credit score, the more eligible you are for receiving credit. There are three main companies that produce your credit report. These include Equifax, Experian and TransUnion. When you apply for credit, the lender will consult at least one of these credit reporting companies, if not all three.
Profit and Loss Charge-offs
A profit and loss charge-off is when a borrower becomes delinquent on an outstanding debt and the lender writes off the debt. This does not mean that you are free from the debt, it just means that the company has given up on collecting the debt from you in the normal fashion. Charge-offs appear on a company's profit and loss statement, which they in turn present to the Internal Revenue Service. Specifically, charge-offs appear as "bad debts" in the loss section of the statement. This in turn has an impact on the creditor's taxes. This is why a creditor may list a delinquent debt as a "profit and loss charge-off" on your credit report. A profit and loss charge-off seriously diminishes your credit score and will jeopardize your chances of obtaining credit in the future.
Resolving Bad Debt
When a creditor writes off a delinquent debt, they will not give up on it. They will likely exercise one of two options. They may either attempt to collect the debt using their internal debt collection department or they may sell the debt to a debt collection agency. If the debt is large, they may even take you to court. Paying the debt at this point may clear up any business you have with the creditor, but it will not change the fact that you have a profit and loss charge-off on your credit report. Simply paying off the debt will change the profit and loss charge-off to a paid charge-off, which is only slightly better than a profit and loss charge-off. Both types of charge-offs, paid or unpaid, remain on your credit report for seven years.
Resolving Profit and Loss Charge-offs
If the company uses an internal debt collection department to collect your debt, you may still have a chance in removing your profit and loss charge-off from your credit report. This involves communicating with the company, both over the phone and by writing. All companies wish to have debts paid to them somehow. You can thus negotiate payment with the company provided that they remove the charge-off from your credit report. This may involve either the full amount or a negotiated partial amount. This tactic does not always work and will depend purely on the nature of your debt and the company in question.