A Charge-off or write-off is a situation in which a credit card issuing institution is faced with a delinquent loan of such severity that it must temporarily or permanently absorb the entire amount of the debt in order to clear that amount from its records.

The credit card issuing institution may still attempt to collect some or the entire amount that is owed by a merchant or individual through a traditional recovery process. In addition to the amount owed, the credit card issuing institution will virtually always remove the merchant or individual account itself.

When the credit card issuer absorbs the debt as a loss, it usually occurs with accounts that have been delinquent for a minimum of at least one hundred and eighty days. This type of debt can be classified as “bad debt expense” on a merchant income statement and thus removed from merchant balance sheet. While the lender takes a loss, the debtor will receive a substantial credit rating drop as a result.

When a merchant declares a charge-off, in which a customer account is uncollectible, the merchant usually assigns the debt to a collection agency that acts on its behalf to seek the funds owed or at least gain a portion of the balance that is due. The collection agency essentially pays the merchant off for the account then proceeds to attempt to exact more for the payment that has been thus far uncollected from the customer.

There are over one and a half million people that file for bankruptcy each year in the U.S., and 50% of charge offs are results of such bankruptcy filings. Of course, when a bankruptcy is granted, the debts are alleviated and are not able to be sold to third party collection agencies.

Charge-offs have a negative effect on credit scores. More than one-third of a merchant or customer credit score is based on payment history. It is one of the most valued elements that lending institutions look at to determine the risk factor of a credit candidate. A recorded charge-off essentially reveals the failure to make payments due on an account. The result is, of course, a lower credit rating and higher future interest rate.

In some cases, a customer or merchant can attempt to negotiate with the lending institution who issued a charge-off on the account. There is the ability to have the charge-off reclassified as a “Paid as Agreed,” which will removes the issue from a credit report. When entering into such an agreement with the lender, a record must be made in the form of contract.