If you’re in the middle of financial woes and do not see a clear way out, you may be thinking about bankruptcy. One common element most people have in their bankruptcy cases are charged-off accounts. Understanding what happens with these charged-off accounts during the bankruptcy process can be a bit confusing.
What are charge-offs?
When a borrower defaults on their loan, the creditor may decide to charge-off the debt after making multiple attempts to collect payment from the borrower. When a charge-off happens, it’s considered bad debt and allows the lender to remove the debt from their accounting books and close out the account. Most lenders will sell the charged-off account debt to a collection agency that will continue to try to collect on the debt.
Filing for bankruptcy
When you submit your legal paperwork to file for bankruptcy, you’ll want to include any charged-off balances that you have. These include credit card debt, loan debt and other forms of unsecured debts. When you’re filing for bankruptcy, you have two different options. These are Chapter 7 bankruptcy and Chapter 13 bankruptcy. The type of bankruptcy that you choose will determine what happens to the charged-off accounts.
When a person files for Chapter 13 bankruptcy, they’re essentially asking for a break from collection activities to come up with a plan to restructure the payment of their debts. If you file for this type of bankruptcy, a credit counselor will work with you to establish a fair repayment plan for the debts that you owe. Once the repayment plan is approved by a judge, the creditors will collect on the funds that are owed to them according to the agreement.
In the event of a Chapter 7 bankruptcy, your non-exempt assets will be sold, and the proceeds will be used to pay off your debts. If the proceeds are not high enough to cover all of the debts that you owe, the bankruptcy judge will likely discharge some of the debts that you owe. This means that you do not have to pay them back.
While no one wants to take out a debt that they are unable to pay back, life circumstances can change. When a person is unable to pay back their creditors, they’ll likely experience charged-off accounts. As you file for bankruptcy, it’s important to include these accounts on the bankruptcy paperwork so that the debts are handled as part of the overall bankruptcy proceedings. An attorney may help you make sure the process goes smoothly.