Charge-Off

How Charge-Offs Work

When a borrower stops making payments on a consumer credit obligation, the creditor follows a standardized timeline. After 30, 60, 90, and 120 days of missed payments, the account progresses through increasing stages of delinquency. At the 180-day mark, regulatory and accounting standards (including OSFI guidelines for federally regulated institutions) require the creditor to classify the receivable as a charge-off.

The charge-off triggers several actions. The creditor writes the receivable off its balance sheet, recognizes the loss in its financial statements, and reports the status to the credit bureaus. The borrower's credit report will reflect the charge-off for up to seven years from the date of first delinquency.

Charge-Off vs. Write-Off

The terms "charge-off" and "write-off" are often used interchangeably, though they have slightly different implications depending on the institution. In banking, a charge-off specifically refers to the regulatory requirement to reclassify the receivable. A write-off is the broader accounting action of removing an asset from the books. For the secondary debt market, both terms describe receivables that have been deemed uncollectible by the original creditor and are now available for portfolio sale.

What Happens After a Charge-Off

After charging off the receivable, the creditor has several options:

• Internal collection. Continue attempting to recover the balance using in-house recovery teams.
• Third-party placement. Assign the account to a collection agency on a contingency basis.
• Portfolio sale. Sell the receivable (individually or as part of a portfolio) to a debt buyer who acquires full ownership and collection rights.

Portfolio sales are increasingly common because they provide the creditor with an immediate, known recovery amount while transferring ongoing collection risk and operational burden to the buyer.

Charge-Offs in the Canadian Context

Canadian financial institutions follow OSFI guidelines and IFRS 9 accounting standards for recognizing and measuring expected credit losses. The charge-off threshold aligns with the 180-day convention used across North American consumer lending. Once charged off, these receivables enter the Canadian secondary debt market, where specialized portfolio buyers evaluate and acquire them based on data quality, documentation completeness, and recovery potential.