For most in the collection industry settlements signal the end of the debt collection cycle. Collectors are happy to have come to an agreement that resolves the debt and gets money for their client. Consumers are happy to have clarity on their situation and a plan to repay their debt. But, for creditors there is still one last decision to make: At what point do you write off the part of the debt that isn’t being paid? Surprisingly, there is no hard and fast rule.
Guidance
The Federal Financial Institutions Examination Council (FFIEC) states in their Uniform Retail Credit Classification and Account Management Policy that losses should be recorded when the creditor “becomes aware of the loss[.]” The question then becomes: What does it mean to be aware of a loss? That could be when the agreement is reached or concluded (by payment or default).
The Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, and the Office of Thrift Supervision in a joint 2003 guidance on credit card lending quotes from the FFIEC policy above but, also recognized that “a number of issues may make immediate charge-off impractical[,]” and allows for charge-off of the deficiency balance 30 days after the final payment is made.
The OCC’s Handbook from 2021 states that “the portion of the balance that will not be paid by the borrower should generally be charged off when the agreement is reach.” This seems like a solid rule until you consider the inclusion of the word “generally” and the next sentence which creates an exception for creditors whose technology does not allow for a partial balance charge-off. The solution for that exception is to charge off the remainder of the balance within 30 days of the final payment or first missed payment.
Methods
With the lack of certainty around the issue, two primary approaches have emerged in the industry. One approach follows the main rules set by the 2003 guidance and the OCC’s Handbook and opts to recognize the loss as soon as the creditor and consumer reach the agreement. The other approach is to wait 30 days after the final payment is made (or the first missed payment) to write off the debt per the exceptions provided in those two documents.
Under the first method, the creditor acknowledges that the settlement agreement signifies that the remaining balance is unrecoverable and accelerates the write-off. This method offers the advantage of immediate clarity regarding the account. By recognizing the loss early, creditors can adjust their financial projections and strategy, potentially minimizing the impact of the defaulted debt without having to wait for the settlement to be completed.
The second approach involves allowing consumers to progress through the agreed-upon payment plan and only recognizing the loss at the settlement’s conclusion. In this scenario, creditors withhold recognizing the debt write-off until the consumer fulfills, or fails to fulfill, their obligations as outlined in the settlement agreement. This method allows creditors to delay the decision as the consumer makes payments before having to decide how much of the debt will need to be written off.
Join the Conversation
Both approaches to debt write-off—recognizing the loss when the agreement is reached or at the settlement’s conclusion—present distinct advantages and considerations for creditors and banks. While one offers immediate clarity and adjustment, the other allows for the settlement to progress before having to decide how to write off the remaining balance. How do you navigate this critical aspect of debt recovery? Let us know in the comments below.
