Charge Off – Collectible vs. Uncollectible
When a borrower stops making payments, most lenders will eventually charge off the loan, moving the loan from their books and accounting for the loss in uncollected revenue. But those two options alone can be fairly binary; many lenders instead charge off loans in two distinct stages, Collectible and Uncollectible. If this distinction aligns with your own lending and servicing model, we recommend tracking them with Loan Statuses and Sub-statuses.
The first stage, "Charge Off - Collectible," is a situation in which there is some chance that no more payments will be made on a loan, but collections efforts should still be made. The decision to move a loan into this stage of charge off is usually made based on the number of days the loan is delinquent (usually 120). At this point, the loan should be put into a status that reflects this, with something like Open as the status, and Charge Off - Collectible as the sub status. The loan should be moved to personnel or a department that will perform harder collections in order to make sure all collections efforts have been exhausted. If payments are collected on a loan in this stage, they will apply towards the loan showing a typical waterfall application (e.g. how the payment applies to interest, principal, fees, escrow, etc.).
The second stage of charge off is when the loan balance is almost certainly uncollectible. In this stage, usually the loan balance is formally charged off. This will reflect in the writing off of the value of the loan note asset for accounting purposes and reporting the loan as charged off to the credit bureaus. Once a loan has entered this stage of the charge off process, no more efforts are made to collect on the loan. The loan should be moved to a new status that reflects the charge off. Something like Closed as the status and Charged Off - Uncollectible as the sub status. If the customer unexpectedly makes a payment on the loan at this point, the amount can be logged as a recovery payment, which directly applies against the charged-off amount. Recovery payments don't show a typical waterfall application (e.g. how they applied to interest, principal, fees, escrow) and instead just show the amount. Because of this, it is important that the choice to charge off the loan is deliberate.