Managing Charge-Offs: When Credit Unions Should Write Off Debt vs. Continue Collection Efforts

A credit union does not necessarily have to choose between charging off a loan and continuing to pursue recovery. A charge-off is primarily an accounting action recognizing that a loan is unlikely to be collected in full. It does not, by itself, forgive the debt or automatically end every available collection option.

At Sorenson Van Leuven, PLLC, we help credit unions throughout Florida and Georgia evaluate charged-off and delinquent accounts within the larger collections strategy. That means looking beyond the accounting treatment to determine whether continued collection, litigation, recovery against collateral, or another approach still makes sense.

What Does It Mean to Charge Off a Loan?

The NCUA’s Loan Charge-Off Guidance emphasizes the importance of a written, consistently applied charge-off policy for loans presenting a high probability of loss.

Charging off a loan removes the uncollectible amount from the credit union’s loan assets for accounting purposes. But charged-off accounts may still produce recoveries, and collection activity may continue when legally available and economically reasonable.

“A charge-off answers an accounting question. It does not necessarily answer the legal question of whether there is still a practical path to recovery.” - Attorney Jim Sorenson

When Does Continued Collection Make Sense?

A charged-off account may still warrant attention when there is a realistic source of recovery.

That could include a borrower with identifiable assets or income, valuable collateral securing the loan, an enforceable guaranty, or circumstances suggesting that litigation could produce a meaningful recovery.

Credit unions should consider factors such as:

• The outstanding balance
• Available collateral and lien position
• The borrower’s financial circumstances
• Previous collection efforts
• The expected cost of litigation or outside collections
• Applicable deadlines
• Bankruptcy or other legal restrictions

A higher balance alone does not necessarily justify litigation. The question is whether the likely recovery warrants the time, expense, and resources involved.

When Should a Credit Union Stop Pursuing an Account?

There are also circumstances where additional collection efforts may no longer make practical sense.

The borrower may have no identifiable assets or income available for collection. Prior efforts may have produced no meaningful response. The likely recovery may be too small to justify further expense.

Legal issues can also change the analysis. For example, statutes of limitation can restrict the ability to bring a lawsuit on an older debt. The CFPB’s overview of time-barred debts explains why the age and type of debt, applicable state law, and previous account activity can all matter.

Bankruptcy may present another limitation. If a debt has been discharged, continued collection activity may be prohibited even though the account had previously been charged off.

These are reasons to evaluate charged-off accounts individually rather than treating every balance the same way.

Keep Compliance Part of the Decision

Continued collection after charge-off remains subject to applicable consumer protection and collection laws.

For Florida accounts, that includes considering the Florida Consumer Collection Practices Act, which prohibits specified conduct in connection with consumer debt collection.

Georgia has its own laws governing collection remedies and limitations periods. Federal requirements may also apply depending on who is collecting the debt and how the account is being handled.

A credit union’s post-charge-off workflow should therefore include both a recovery analysis and a compliance review.

Build a Process for Reviewing Charged-Off Accounts

Charge-off should not necessarily be the point where an account disappears from active consideration.

A stronger process identifies which accounts still warrant recovery efforts, when those accounts should be reviewed again, when counsel should become involved, and when further collection is no longer worthwhile.

At Sorenson Van Leuven, PLLC, we work with credit unions in Florida and Georgia to evaluate those decisions as part of the broader collections process. We also help teams understand why one account may warrant litigation while another is better closed out after reasonable recovery efforts have been exhausted.

Decide Which Charged-Off Accounts Are Still Worth Pursuing

The fact that a loan has been charged off does not answer what the credit union should do next.

If your team is deciding which charged-off accounts warrant continued collection, litigation, or additional legal review, schedule a brief introductory call with Sorenson Van Leuven, PLLC. We can help evaluate the recovery options and develop a more consistent approach to post-charge-off accounts.