When companies or lenders charge off a debt, they’re able to write it off for tax purposes. However, you still owe the money and nothing about the terms of the loan changes as a result of a lender taking this step. You are still fully responsible for repaying the debt.
How an auto loan charge-off works
When a lender considers an auto loan debt uncollectible, it can choose to begin the charge-off process, which includes a variety of steps with ramifications that will affect you.
The debt is shifted from asset to liability. Step one of an auto loan charge-off is simply an accounting classification. The lender shifts the loan from its assets column and officially categorizes it as a liability. At this point the loan is no longer considered income for the lender.
Notification of default. Depending on the state you live in, the lender may be required to send you a notice of default and give you a chance to repay the outstanding debt. Not every state requires this.
A third-party collection agency may take over collection. Often when a loan is charged off by the original lender, it’s sent to a third party, such as a collection agency, which takes over pursuing debt repayment. Collection efforts may even include suing you for repayment. If there’s a judgment against you, a portion of your wages may be garnished as repayment.
The charge-off is reported to credit bureaus. Once a debt is charged off by a lender, your credit score also takes a hit. Read more here:
