All About Debts

Have you been told by a creditor that your debt is about to "charge-off"? Did the bill collector make it sound like you will be ruined financially if you allow this catastrophe to happen? If you're behind on your bills, unable to keep up with payments on your credit cards and other debts, sooner or later you will hear a creditor representative threaten you with the dreaded "charge-off." So what is a charge-off anyway? Should you be worried? What are the consequences of this mysterious event?

Debt Help I'll start by explaining what a charge-off is NOT. Because the term includes the word "charge," many people mistakenly think it has to do with cancellation of the account by the creditor. In other words, you can't "charge" anything on your credit card anymore. But it's not the same thing at all, and most banks will revoke charging privileges around 2-3 months before the deadline we're talking about here.

These days, the average American family owes more than $9, 000 in credit card debt, which likely means that more people are dying with outstanding credit card balances.⁵ And the laws governing credit card activity vary by state. In certain U.S. states, for example, the law indicates that a surviving spouse may still have to pay off credit debts even if there are no assets left in the estate to cover those costs. Yet, to use an alternate example, if your late husband gave you a credit card that you used but never signed an application for (meaning that it was solely in his name), you are not legally responsible for his credit card debts.⁶

Counseling Debt What banks and bill collectors call a "charge-off" is the point at which the creditor writes off the account balance as a "bad debt." It usually happens after six months of non-payment. After that, they no longer count it on their books as an asset. You still owe the money, of course. And they will certainly make continued attempts to collect it from you. But the creditor has been forced by the rules of accounting to zero out the debt on their financial ledgers. For causing this loss, they will punish you by placing a derogatory mark on your credit report. A "charge-off" is a serious negative mark, to be sure, but it is not the financial ruination that debt collectors would like to have you believe it is.

Credit card and even more so Store card interest are set at exorbitant rates for one reason alone, companies make their money from the consumer’s inability to settle their card balances. Credit card debt is unsecured, whereas other debt like your mortgage is secured (your home acts as security against your debt). With credit card debt, there is no backing security, which means that credit card debt is high risk for banks and hence the high interest rates

Consolidation Consumer Debt Should charge-offs be avoided if possible? Certainly. Does the prospect of a charge-off mean you should panic if you have no way to pay the bill? No! Is it the end of the world if the account has already charged off? No! Too often, bill collectors make a charge-off sound so bad, and they apply so much pressure, that people cave in and make payment commitments they cannot keep. Collectors usually demand payment via post-dated checks, and this frequently leads to bounced checks and even worse financial problems. Most of us are brainwashed by the banks and media on the subject of credit. Sure, good credit is important. But committing to payments you really can't afford just to preserve your credit is like watering the lawn while your house is burning down.

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Debt Settlement Here are a few simple rules to follow when trying to avoid a charge-off that hasn't happened yet:

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Debt Free * Don't be intimidated or threatened by pre-charge-off collection tactics. Keep a cool head and don't take it personally when collectors try to get under your skin.

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Consolidation Debt Service * Call your creditor to find out the minimum payment necessary to avoid the charge-off, and subsequent payments to keep the account current going forward. Don't commit to this payment (or series of payments) unless you're sure you can follow through.

Company Consolidation Debt * Negotiate a lump-sum settlement at 50% or less if you have the resources, or a workout plan for monthly payments that you can live with.

Consolidation Debt Online * Do not allow bill collectors to talk you into using post-dated checks, or providing your checking account details over the telephone. Instead, make payments via cashier's check or money order.

Consolidation Debt Free * Do not make payments based on a verbal arrangement. Get the deal in writing and signed by a creditor representative who has authority to approve the workout plan.

Debt Problem What should you do if you simply don't have the money to rescue the account from charge-off, or if the account has already been charged off by the creditor?

Credit Debt * Take a deep breath and relax; the sky won't fall on your head just because you had a charge-off.

Advice Debt * Realize that you still have an opportunity to resolve the matter by dealing with the original creditor or the collection agency assigned to the account.

Card Credit Debt Eliminate * Negotiate a lump-sum settlement with the creditor or collection agency. Again, aim for 50% or less, and ask for the charge-off to be deleted from your credit report as a condition of the settlement. (Most creditors will not agree to this, but it's worth asking anyway. Do be sure that they will update your credit report to show that the matter has been resolved and the account has been satisfied.)

Debt Recovery * If you can't work out a deal with the collection agency assigned to your account, then wait until it goes to another agency! Eventually, it will either be assigned or sold to an outfit that you can deal with to get the matter cleared up.

Counseling Credit Debt To sum up, a charge-off is not the end of the world. It should certainly be avoided if possible, but not at the risk of making things worse by committing to payments you're not sure you can keep up with. Just remember that the creditor doesn't want to see a charge-off any more than you do, so use that knowledge to your advantage in working out a mutually acceptable arrangement. Get everything in writing, don't disclose your checking account details, and follow up to make sure the creditor reports the matter correctly on your credit report. You'll find that it's easier than you think to resolve a charge-off situation before it happens, or clean it up if it's already taken place.

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Debt Reduce Charles J. Phelan has been helping consumers become debt-free without bankruptcy since 1997. A former senior executive with one of the nation's largest debt settlement firms, he teaches consumers a do-it-yourself method of debt negotiation & settlement. Expert training via audio-CD plus personal coaching helps debtors achieve professional results at a fraction of the cost. To learn more, please visit http://www.zipdebt.com

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