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Charge-off
Also called chargeoff, written off, bad debt write-off.
An accounting decision by the creditor to stop treating a balance as collectable, which changes the creditor's books and not your obligation to pay it.
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What it means
Bank regulation and internal policy require lenders to write off balances that have been delinquent beyond a set period. The loan moves off the performing book and becomes a loss for reporting purposes. Nothing about that reduces the borrower's liability.
What usually follows is one of three things. The creditor keeps collecting internally, it places the account with a collection agency on contingency, or it sells the debt to a buyer who now owns the claim and can sue on it. Judgment and enforcement remain available to whoever holds it, subject to the applicable statute of limitations, which varies by state and by contract type.
On credit reporting, a charged-off account is recorded as such and stays on the file for a period. Business credit reporting is less standardized than consumer reporting, but a charge-off, a judgment or a UCC-backed collection filing will surface in commercial reports and will affect future funding.
For an SBA loan, the process is different again: the lender pursues liquidation, may seek payment on the guaranty from the agency, and the government can pursue the borrower and guarantors for the balance through Treasury referral and administrative collection.
Where this one catches people
Charge-off is regularly mistaken for cancellation. It is not forgiveness, it does not extinguish the debt, and it does not stop interest or fees where the contract provides for them. Actual cancellation is a separate event, usually documented in a settlement, and canceled business debt generally has tax consequences, which is why a 1099-C sometimes arrives afterwards. A charged-off balance can be sold and sued on years later.
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Charge-off — common questions
What does charge-off mean?
An accounting decision by the creditor to stop treating a balance as collectable, which changes the creditor's books and not your obligation to pay it.
Where does charge-off catch people out?
Charge-off is regularly mistaken for cancellation. It is not forgiveness, it does not extinguish the debt, and it does not stop interest or fees where the contract provides for them. Actual cancellation is a separate event, usually documented in a settlement, and canceled business debt generally has tax consequences, which is why a 1099-C sometimes arrives afterwards. A charged-off balance can be sold and sued on years later.
Is charge-off the same as an interest rate?
Charge-off is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does charge-off apply to?
Merchant Cash Advance, Working Capital, Term Loan, Business Line of Credit, SBA Loan.
Is there a worked example of charge-off?
Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.
What else should I read alongside charge-off?
Bankruptcy, Collections, Default, Judgment, Settlement.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.