Charged Off as Bad Debt: A Guide to Recovering $14,000,000,000 in Lost Revenue

What is a Charge-off?

When a lender determines that a loan is uncollectible, it may "charge off" the debt as a tax deduction. This means that the lender no longer expects to collect the money and will remove it from its balance sheet. As of 2021, there were an estimated $14,000,000,000 in charged-off debt in the United States alone.

Why Should You Care?

If you're a lender, charge-offs can significantly impact your bottom line. In 2020, banks charged off an estimated $11.9 billion in commercial and industrial loans. For small businesses, charge-offs can be even more devastating. A study by the National Federation of Independent Business found that businesses with charge-offs are 45% more likely to close within the next five years.

What Can You Do?

If you're a lender, there are several steps you can take to reduce your risk of charge-offs, including:

1) Carefully screening borrowers. Before approving a loan, be sure to assess the borrower's credit history, income, and debt-to-income ratio.
2) Setting clear loan terms. Make sure borrowers understand the interest rate, repayment schedule, and consequences of default.
3) Monitoring loans regularly. Keep track of borrowers' payments and contact them if they fall behind.
4) Working with delinquent borrowers. If a borrower falls behind on payments, be willing to work with them to create a payment plan.
5) Charging off loans as a last resort. Only charge off a loan after you've exhausted all other collection efforts.

What if I'm a Borrower with a Charged-Off Loan?

If you have a charged-off loan, it's important to understand the impact it will have on your credit score and your ability to borrow money in the future. Additionally, a charged-off debt can prevent you from certain governmental benefits, such as food stamps or housing assistance.

Next Steps

If you're a lender with a high number of charged-off loans, it's time to take action. By implementing the strategies outlined in this article, you can reduce your risk of charge-offs and improve your bottom line. If you're a borrower with a challenged-off loan, it's important to understand the impact it will have and take minimizing the damage. By following the advice in this article, you can improve your credit score and get back on track financially.

Tables

Table 1: Charged-off debt by industry (2021)

Table 2: Consequences of charge-offs for lenders

Table 3: Consequences of charge-offs for borrowers

Table 4: Strategies to reduce the risk of charge-offs