Charge Offs in Bankruptcy

A charge off is often confused with a repossession, but these are separate concepts. A repossession happens when a debtor fails to keep up with payments on a loan that is attached to a certain asset, such as a car, and the creditor on that loan takes control of the asset as a result. Foreclosure can be seen as a type of repossession that applies to real estate. By contrast, a charge off means that a lender has transferred its debt to a collection agency. You may find this term on your credit report and believe that it means that you no longer owe the debt, but this is not true.

From the perspective of a lender, a charge off discharges its collection responsibilities and allows it to remove the debt from its records. From the perspective of a debtor, a charge off may result in more aggressive rather than less aggressive collection efforts. The collection agency will pursue the debt on the lender’s behalf if it was retained by the lender. If the lender sold the debt to the collection agency, the agency will pursue payment on the debt on its own behalf. Charge offs must happen within a certain period under Federal Reserve rules. For a car loan, the lender must charge off the debt after 120 days without payment. For a credit card debt, the lender must charge it off after 180 days without payment.

Dealing with a Charged Off Debt During Bankruptcy

Whether you file for bankruptcy under Chapter 7 or Chapter 13, you will need to provide the court and the bankruptcy trustee with a comprehensive accounting of your finances. Part of your bankruptcy petition comprises a list of your debts. You should be aware that you will need to list debts that appear as charged off on your credit report. This is because debts that are charged off are still valid. If you do not list a charged off debt, you may not be able to get it discharged in bankruptcy.

If the charge off involves an unsecured debt, which may be a credit card debt or a debt owed to a health care provider, you can get the debt wiped out in either Chapter 7 or Chapter 13. A Chapter 7 case takes only a few months, while a Chapter 13 case lasts three to five years. If you have discretionary income or non-exempt property, your Chapter 13 repayment plan will consist in part of paying off these unsecured debts to the extent possible. However, many debtors cannot fully pay off unsecured debts or pay them off at all. These debts still will be discharged at the end of your repayment plan, as long as you have kept up with payments under the plan.

The situation may be more confusing when the charge off involves a debt that was initially secured to an asset, such as a home or a car. People who file for bankruptcy probably no longer have the asset attached to the debt, since their financial struggles likely have prevented them from keeping up with payments on the loan. Any remaining portion of this debt, which is often known as a deficiency balance, can be listed as an unsecured debt in your bankruptcy petition. In the event that you still have the asset that is attached to the debt, you may be able to save it, but you should consult an attorney to discuss the specific details of your situation.