Charged-off debt is a balance a creditor recognizes as a loss for accounting purposes. Learn what charge-off changes, what it does not, and how recovery works.
Charged-off debt is a loan or receivable that a creditor has removed from its reported assets, in whole or in part, after determining that the amount is uncollectible under the applicable accounting and regulatory policy. A charge-off recognizes loss; it does not by itself forgive the debt, cancel the contract, discharge the borrower, or prohibit later recovery.
For a creditor, charge-off reduces the carrying amount of the loan or receivable and records loss through the institution’s allowance or other applicable account. If cash is collected later, the creditor can record a recovery under its accounting policy.
For a borrower, the account may still be subject to collection or sale. Credit reporting can also continue under applicable accuracy and reporting-period rules. A debt can be charged off without being sold, and it can be sold without being legally forgiven.
| Term | Main meaning | Does the borrower necessarily stop owing? |
|---|---|---|
| Charge-off | Creditor recognizes all or part of a receivable as a loss | No |
| Delinquency | Payment is late under the agreement | No |
| Collection placement | Creditor assigns collection activity to an internal team or outside agency | No |
| Debt sale | Ownership of the claim is transferred to a buyer | No |
| Settlement | Parties agree that specified performance resolves the claim | Depends on the agreement and completion |
| Forgiveness or cancellation | Creditor releases some or all of an obligation | Yes, to the extent validly released, subject to the terms |
| Bankruptcy discharge | Court order releases personal liability for covered debts | Yes for covered personal liability, but valid liens may be treated differently |
For U.S. banks subject to the federal retail credit classification policy, closed-end retail loans generally must be charged off when loss is identified and no later than 120 days past due. Open-end credit such as credit-card accounts generally must be charged off at 180 days past due. Residential real-estate-secured credit, bankruptcy, death, fraud, and other circumstances have distinct guidance.
These are bank regulatory classification rules, not a universal statement that every debt is forgiven after 120 or 180 days. Other lenders, jurisdictions, accounting frameworks, and products may use different policies.
A bank has a $10,000 unsecured account and has already established a $7,500 allowance for expected credit loss. It later concludes that the full $10,000 balance should be charged off.
The specific accounting entry depends on the applicable framework, but the simplified economic view is:
Six months later, the bank receives $1,200 from the borrower or from selling the claim. That cash is a recovery after charge-off. It does not reverse the historical fact that the account had been charged off, and the borrower’s remaining legal obligation cannot be calculated without the governing records.
A gross charge-off rate commonly compares charge-offs during a period with average loans:
A net charge-off measure subtracts recoveries:
Analysts should match the portfolio, period, annualization convention, and denominator. A rising rate may reflect weaker borrowers, seasoning, underwriting, economic conditions, portfolio sales, policy changes, or a mix of these factors.
For U.S. consumer collection, a debt collector generally must provide validation information identifying the debt and explaining dispute rights. Consumers should use current official instructions and qualified legal help when deadlines or litigation are involved.
This article is educational and uses U.S. examples where stated. It does not determine a particular debt’s balance, enforceability, tax treatment, reporting period, or settlement strategy.