When credit card bills go unpaid, the past due balance becomes continuously delinquent. The likelihood of extremely delinquent accounts being paid is rare, so the credit card company considers the balance a loss and decides to remove the bad debt from its profit and loss statement. This charged-off balance is not removed from the consumer's credit report, but removed from the credit card company's accounting records. After an account is charged off, new collection action usually occurs.
Internal Collections Process
Credit card company accounting departments use an aging system to determine the age of a debt. When a credit card payment is missed for one month, the aged balance becomes 30 days past due. The balance will continue to age each month until all or part of it is paid.
Internal collection action usually begins when a payment is not received 30 days past the due date. This collection action is conducted by employees of the credit card company and is usually done by telephone or through the mail.
Account Closed by Credit Grantor With Balance
When an account falls into the 60 days past due category, credit card companies often close the account to prevent the cardholder from creating additional debt that will not be paid. Whenever there's an account closed by the credit grantor with a balance, collection activity is still conducted by the grantor. This ensures that if payment is received, the entire amount will be applied to the balance outstanding on the credit card company's financial statement.
Credit card companies will keep closed accounts on the books well into the 120 days past due time-frame so they can receive all of the money paid. When an account is transferred to an outside collections agency, a percentage of any payment received is given to the agency, reducing the amount paid to the credit card company.
Closed Account Charge Off
After attempting collections without success, the credit card company will charge off the account to remove it from the books. The credit company has resigned that they will not receive payment and takes a loss on the account.
When a charge off occurs depends on the balance but it usually occurs after six months of non-payment. Smaller balances are often charged off sooner than larger balances because they do not have as much financial impact on the credit card company's financial performance.
Use of External Debt Collectors
A charged off account is not removed from an individual's credit report. On the contrary, it has a very negative impact on one's credit and he or she remains responsible for payment of the debt even though paying a closed account will do nothing to improve credit score.
When an account is charged off, external debt collectors purchase the debt from the credit card company for a portion of its face value. This allows the credit card company to recover a portion of the debt loss and the debt collectors make money by retaining any payments received from the debtor.
Since collection of old debt is a losing battle, these companies are often willing to make settlements. After all, the debt was purchased from the credit card company for less than the balance they are collecting. Collection companies may also add interest and fees to the debt balance to increase their profitability.
Statute of Limitations on Debt
Charge offs and other payment delinquencies can remain on an individual's credit report for seven years following the first past due instance. The statue of limitations for debt collection varies from state to state, but usually falls within the three to five year range.
This means that a debt collector can not legally sue for payment of a charged off credit card debt once it is outside the statute of limitations time-line. Although no collections action can be taken, the individual will still need to wait seven years to see it removed from a credit report.
Old debt is often sold from one debt collector to another right around the time that the statute of limitations would expire, so the date of last collection is often recorded on credit reports. Fortunately, the statute applies to the charge off date of the original credit card account.