Charge Off Vs Collections

[Anonymous]

Can someone please tell me what the difference is between charge off and collections as it pertains to your credit report?  Is it the same thing or are they weighed differently?

[RobertEG]

A charge off is an accounting measure taken by the OC to write debt off on their books, thus reducing tax liability.  It remains under their jurisdition should they decide to initiate any additional  legal collection activity.

A collection is sale of the debt to a third party collection agency at a reduced amount of the debt. 

The FCRA restirictions on when these must drop from your CR are the same.... 6 mos plus seven years from the date of the delinquency that ultimately led to the CO or CA activity.   The date of charge off or placing into collection have no bearing on its dro-off date.

[fused]

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JewelryGirl wrote:

Can someone please tell me what the difference is between charge off and collections as it pertains to your credit report?  Is it the same thing or are they weighed differently?

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Generally speaking, a charge-off and a collection will have the same negative affect to scores. The difference between the two pertains to balances. A collection reporting a balance (upaid) never factors in FICO utilization calculations, whereas a CO being reported by an original creditor does.

In sum, aside from balances both COs and collections are serious derogs and have the same affect to scores as 90+ day lates, tax liens, other public records, foreclosures and repos. From a scoring stand point, all of these are equally bad.

Message Edited by fused on 07-09-2008 04:11 PM

[Anonymous]

Wow.  Thanks guys.  Great info.

[Anonymous]

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RobertEG wrote:

A collection is sale of the debt to a third party collection agency at a reduced amount of the debt. 

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Just to clarify:

Collections do not always involve the sale of the debt.  Sometimes a creditor may retain ownership of the debt but assign (hire) a third-party collection agency to collect that debt on the creditor's behalf, in exchange for a portion of the amount collected.

Message Edited by cheddar on 07-09-2008 07:17 PM

[Anonymous]

is the original creditor required to report a zero balance if they have sold the account?

[Anonymous]

yes-

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rob22 wrote:

is the original creditor required to report a zero balance if they have sold the account?

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[Anonymous]

Is there a law or regulation (banking) that requires this?  If you know please advise as to where I can find it.  Thanks

[RobertEG]

Cheddar is, as always, correct. 

An OC can do a legal charge off of debt in order to then, in their next quarterly IRS tax return, to then claim the unpaid debt as an offset against income.  They do this at around 180 days from the debt-due-date.  They get a tax deduction.

But they still have to consider the down-the-road implications of that IRS CO, for they are they still the legal holders of the account.

The original creditor remains the one owed the original debt. 

The OC can then do two things.  They can sell the entire account to a CA, and thus have no more account interest, or they can choose to remain legal holder of the acoount debt, and merely contract with a CA, as an assignee for account collection.

So, as Cheddar has said, a CA may or may not be the legal holder of an account, depending upon wheter it was assigend solely for collection, or sold.

[Anonymous]

I have a charge-off that reports late every month.  Is that how a CO is suppose to work?

The balance was transferred to a CO- but they have never reported me to any CRA and work with me without much drama.  Each payment I make brings the balance lower on the OC account that was charged off.  Should I care or does it matter that it reports as a late payment each month even though it was charged off?