According to American Debt Advisor, as of the date of publication of this article, the average amount of American debt was approximately $129,000. This debt included student loans, mortgages and past due credit card bills. While most financial institutions would prefer to get all of the money they loaned to investors back in their pockets, they recognize this is not realistic. Gross and net charge, sometimes called gross charge-off and net-charge-off, are financial terms used by banks and other financial institutions to account for this type of bad debt.
Gross charge, or gross charge-off, is the total amount of money not repaid to banks or other lending institutions during a specific period. In most cases, gross charges occur when individuals or organizations who borrowed a specific amount of money default on their loans. While lenders might calculate gross charge each month, most calculate it quarterly.
Investopedia states that net charge, or net charge-off, is the "amount representing the difference between gross charge-offs and any subsequent recoveries of delinquent debt." When a bank recognizes that a person or business has defaulted or is likely to default on a loan, it takes steps to collect as much of its money as possible. Similarly, after a borrower defaults, it may still be possible to get back some of the borrowed money. After a default, the lender subtracts any money collected from the total amount of the bad debt and classifies it as net charge-off.
What Net Charge-Offs Mean for Banks
Banks and other lenders rely on net charge-offs when it comes to balancing their books. Instead of waiting several months for the borrower to return the money, net charge-offs allow the lender to write off the bad debt as a loss. Net charge-offs are beneficial when it comes to filing income taxes, as they show lower rates of yearly income.
What Net Charge-Offs Mean for Borrowers
Some borrowers might believe that a debt classified as a net charge-off means they are off the hook for the loan. However, this is not the case. Net charge-offs are not forgiven loans. They still require payback to the bank. Borrowers who do not repay their net charge-offs may see their loans turned over to debt collection agencies and reported to credit bureaus. This can result in a poor credit history, and may affect a borrower’s ability to take out a future loan.
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