3 - 2013

Consumer Receivables

Charged off customer receivables are an unfortunate part of the lending world. Because a charge off is an account that has been deemed uncollectable, it can be written off against a lending institution’s taxes. Although this isn’t ideal, it can still allow the company to make a profit by eliminating the tax liability on the loss while still making a small profit on the sale of the collectible debt. Here’s how the system works.

A lending service extends a line of credit to a client. The client fails to make a payment on the loan for a period of at least six months. At this point, the lender identifies this as a bad debt, called a charge off, and may now move the loan from the asset column to the liability column in their books. At this point, the lender has given up all hope of collecting on the debt and tries to find a way to make any money at all from the situation. This is where a company like Cavalry Portfolio Services comes into play. They will purchase the right to collect the debt from the original lender at a discounted price. Then, Cavalry Portfolio Services will attempt to collect the full debt amount to make their profit.

One of the major misconceptions about a charge off comes from the consumer side of the transaction. Some people believe that if their debt has been charged off by the lender that they are no longer responsible to pay it off. This is absolutely not true. The charge off simply moves the status of the loan from asset to liability. In fact, instead of eliminating the debt for the borrower, it puts a large black mark on their credit report.

Charge off buyers are in the business of making money, but they are also in the business of making it easier for customers to reconcile their debts. Where a credit card company or bank lender wants to collect the entire debt in a short period of time, the charge off buyer isn’t concerned about the amount of time it takes to pay off the debt, just that it gets paid off eventually. This means they can work with customers to create payment plans that work within their current budgets.

Here’s why customers should take advantage of the situation. A charge off is almost as bad as a bankruptcy on a credit report. It says that the customer has a record of not paying off debt. This will significantly reduce the borrower’s chances of getting a loan, even at a high interest rate. Reconciling this debt will show that the customer is working with an agency in good faith. The mark on the customer credit report will change from ‘charged off’ to ‘paid charge off’. While this isn’t an ideal situation, it is the first step in rebuilding a borrower’s credit profile.

Companies like Cavalry Portfolio Services are essential in the lender-borrower relationship to eliminate extensive litigation processes. Without debt buyers, credit lenders would need to sue each individual loan default to collect the debt. This would lead to a huge cost for the lender and a need to increase interest rates for those who do pay off their debts on time to cover the losses incurred due to legal fees. By selling off their bad customer receivable debt, these lenders are allowing themselves to recover a small portion of their principal loan while eliminating tax liability on the loan amount. This helps their profit margin and keeps them in business, which is a good thing for all the responsible borrowers out there.

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