Loan operations
What is charge-off?
Charge-off is the accounting action of removing a loan balance deemed uncollectible from a lender's books by charging it against the allowance for credit losses.
A charge-off recognizes that all or part of a loan is uncollectible. The lender reduces the loan balance and the allowance for credit losses by the same amount. A charge-off is an accounting event, not a forgiveness of debt, so the borrower still owes the balance and the lender or a debt buyer can continue to collect.
For retail loans, federal banking guidance generally calls for charging off open-end accounts, such as credit cards, at 180 days past due and closed-end loans at 120 days past due, with special timing for bankruptcy, fraud and deceased borrowers. Commercial loans are charged off when they are identified as uncollectible, often in part, based on collateral values and repayment prospects.
Delaying charge-offs on loans that are clearly uncollectible overstates assets and can draw examiner criticism. Charging off too little on collateral-dependent loans, based on outdated values, has the same effect. Recoveries collected after charge-off are credited back to the allowance, and tracking them accurately is necessary for correct net charge-off reporting.
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