Has a creditor told you that your debt is about to be discharged? Did the bill collector make it sound like you’d be financially ruined if you let this catastrophe happen? If you’re behind on your bills, unable to keep up with your credit card payments and other debts, sooner or later you’ll hear a representative of your creditors threaten you with the dreaded “charge-off.” So what is a cancellation anyway? Should you be worried? What are the consequences of this mysterious event?
I’ll start by explaining what a cancellation is NOT. Because the term includes the word “charge,” many people mistakenly think it has to do with the creditor’s termination of the account. In other words, you can no longer “charge” anything to your credit card. But it’s not the same at all, and most banks will revoke collection privileges around 2-3 months before the deadline we’re talking about here.
What banks and collectors call “write-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 continual attempts to win it back. But the creditor has been forced by accounting rules to zero out the debt on his books. 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’s not the financial ruin that debt collectors would like you to believe it to be.
Should cancellations be avoided if possible? Certainly. Does the prospect of a cancellation 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 been cancelled? No! Too often, collectors make a cancellation sound so bad and apply so much pressure that people give in and make payment commitments they can’t keep. Collectors often require payment via post-dated checks, and this often leads to bad checks and even worse financial problems. Most of us are brainwashed by banks and the media about credit. Sure, good credit is important. But committing to payments you really can’t afford just to preserve your credit is like watering your lawn while your house is burning.
Here are some simple rules to follow when trying to avoid a cancellation that hasn’t happened yet:
* Don’t be intimidated or threatened by pre-cancellation collection tactics. Keep a cool head and don’t take it personally when collectors try to get under your skin.
* Call your creditor to find out the minimum payment needed to avoid cancellation and subsequent payments to keep the account current in the future. Do not commit to this payment (or series of payments) unless you are sure you can keep it.
* Negotiate a lump sum agreement at 50% or less if you have the resources, or a workout plan for monthly payments you can live with.
* Don’t let collectors talk you into using postdated checks or giving your checking account details over the phone. Instead, make payments by cashier’s check or money order.
* Do not make payments based on a verbal arrangement. Get the agreement in writing and signed by a representative of the creditors who has the authority to approve the restructuring plan.
What should you do if you simply don’t have the money to rescue the account from cancellation or if the creditor has already canceled the account?
* Take a deep breath and relax; the sky will not fall on your head just because you had a punishment.
* Please note that you still have an opportunity to resolve the matter by dealing with the original creditor or collection agency assigned to the account.
* Negotiate a lump sum agreement with the creditor or collection agency. Again, aim for 50% or less and request that the write-off be removed from your credit report as a condition of the agreement. (Most creditors won’t agree to this, but it’s worth asking anyway. Make sure they update your credit report to show the matter has been resolved and the account has been satisfied.)
* If you can’t reach an agreement with the collection agency assigned to your account, wait until you move on to another agency! Eventually, it will be assigned or sold to a team that you can deal with to clear the matter up.
In short, a cancellation 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. Just remember that the creditor doesn’t want to see a cancellation any more than you do, so use that knowledge to your advantage to reach a mutually acceptable agreement. Get everything in writing, keep your checking account details, and follow up to make sure the creditor reports the matter correctly on your credit report. You’ll find it’s easier than you think to resolve a cancellation situation before it happens, or to clean it up if it’s already happened.
