Question

under what circumstances is a loan charged off, and what does it mean? what is the effect on earnings?

Answer 1

When borrower, borrow money from Bank under certain terms to repay the loan in future.But sometimes borrower unable to pay or fail to make payment of borrowed amount over long period of time, then under these circumstances then the Bank that lent the loan will charge off loan amount.

A charge off means when borrower or bank declare that the loan amount is unlikely to be collected or paid. The tentative time period can be delay of 6 months in payment by borrower.

Under charge off situation bank declare uncollected amount as loss and write off as an expense on its income statement.Bank still tries to collect the bad debt amount by appointing a collection agent or proceeding with legal action.

Borrower earning is also affected, as due to non payment of loan amount would  impacts negatively on its credit score.Due to lower credit score it will be difficult to get any new loan or even job in future to borrower. If bank wins the case, then bank will freeze borrower savings too.