What Happens Next if a Past Due Loan Has Been Reported to the Credit Bureau?
If after six months or an equivalent of 180 days, the borrower still did not make any communications or payment arrangements with the lending company, the latter resorts to the following courses of action:
(1) Write-off or charge-off the unpaid debt as a bad debt account and then submit a report to the credit bureau, containing information that the past due account was charged-off. The credit report now carries the past due amount under the Charged-Off Debt. This has a greater impact on the credit score of the borrower, since it indicates there was no effort to settle the obligation.
(2) The rationale behind the company’s action to charge-off or write off the past due account is to minimize its losses by converting the bad loan into an expense item. As an expense, the company uses the amount as a deduction to its taxable income. This does not mean, however, the loan between the borrower and the lender has been extinguished. The lending company still has the right to enforce collection in every way it can.
(3) If the amount involved is substantial, which depends on the company’s policy on what it considers substantial, a lawsuit can be filed by the lender against the borrower in order to enforce its right to collect the unpaid debt. In this situation, however, the report submitted to the credit reporting bureau provides information about the past due loan or charged-off debt, and the corresponding lawsuit filed in court.