Guides › Charge-off accounting: how lenders book charge-offs, recoveries and portfolio sales
Charge-off accounting: how lenders book charge-offs, recoveries and portfolio sales
Not accounting, tax or legal advice. General information for lenders and their finance teams, current as of October 18, 2026. Confirm treatment with your auditor, tax adviser and regulator's instructions.
Short answer: Charge-off accounting is how a lender removes an uncollectible loan from its books by debiting the allowance for credit losses and crediting the loan balance, and then credits any later collections, including cash from selling the charged-off accounts, back to the allowance as recoveries.
Key takeaways
- A charge-off moves a confirmed-uncollectible loan off the books: debit the allowance for credit losses, credit loans.
- Later collections on charged-off accounts are recoveries: debit cash, credit the allowance, up to the amount previously charged off.
- Cash from selling charged-off accounts is booked as a recovery through the allowance (OCC Bank Accounting Advisory Series, section 2F).
- FFIEC policy sets maximum charge-off timing for retail credit: 120 days past due for closed-end loans, 180 days for open-end loans such as credit cards.
- CECL (ASC 326) replaced the incurred-loss ALLL with an allowance for all expected credit losses; charge-offs and recoveries still flow through the allowance.
On this page
What could your charged-off accounts bring?
Free, confidential valuation: an estimated range based on market data, not a bid or offer. Summary business data only, and a mutual NDA before any documents. No obligation.
What is a charge-off in accounting?
A charge-off is the entry that removes a loan, or the part of it, that the lender has confirmed it cannot collect.
For lenders that keep an allowance, the loss does not hit the income statement at charge-off. It reduces the allowance that was already built through provisions. Under the FFIEC Call Report Glossary, "when available information confirms that specific loans and leases, or portions thereof, are uncollectible, these amounts should be promptly charged off" against the allowance (FFIEC 031/041 Glossary, "Allowances for Credit Losses").
A charge-off is an accounting entry, not forgiveness of the debt. The borrower still owes the balance unless it is paid, settled, discharged in bankruptcy or forgiven. Separately, a lender may have to file Form 1099-C when an 'identifiable event' occurs, such as a bankruptcy discharge, an agreement to cancel the debt, or a decision to stop collecting under a defined policy, 'whether or not an actual discharge of indebtedness has occurred' (26 C.F.R. § 1.6050P-1).
What is the allowance for loan losses (ALLL vs. ACL)?
The allowance for loan and lease losses (ALLL), now the allowance for credit losses (ACL) under CECL (ASC 326), is a contra-asset that reserves for credit losses in a loan portfolio. Provisions build it, charge-offs draw it down, and recoveries, including proceeds from selling charged-off accounts, add back to it.
| Allowance roll-forward | Effect on the allowance |
|---|---|
| Beginning balance | Starting point |
| + Recoveries (including sale proceeds on charged-off accounts) | Increases |
| − Charge-offs | Decreases |
| − Write-downs arising from transfers of loans to held for sale | Decreases |
| + Provision for credit losses | Increases (decreases if a reversal) |
| ± Other adjustments | Either way |
| = Ending balance (management's estimate) | Result |
Many bankers still say 'ALLL' informally; the call report instructions and GAAP (ASC 326) now use 'allowance for credit losses' (ACL).
How do you record a charge-off? (journal entry)
Illustrative example. All numbers are made up for this page. A lender holds $1,000,000 of consumer loans with an allowance for credit losses (ACL) of $40,000. One open-end account with a $10,000 balance reaches the charge-off point.
| Account | Debit | Credit | Entry |
|---|---|---|---|
| Allowance for credit losses | $10,000 | Dr $10,000 | |
| Loans receivable | $10,000 | Cr $10,000 |
Effect: gross loans fall to $990,000 and the ACL falls to $30,000. Net loans ($960,000) do not change, because the loss was already reserved. The income-statement effect comes through the provision for credit losses, which management records to bring the ACL back to its current estimate.
How do you record a recovery? (journal entry)
Illustrative example. Months later the borrower pays $500 on the charged-off account.
| Account | Debit | Credit | Entry |
|---|---|---|---|
| Cash | $500 | Dr $500 | |
| Allowance for credit losses | $500 | Cr $500 |
Recoveries on loans measured at amortized cost "shall be credited to the ACL," limited to the amount previously charged off on that asset. Any amounts collected in excess of this limit should generally be recognized as noninterest income (FFIEC Glossary).
How do you book a sale of charged-off accounts?
When a lender sells accounts it has already charged off, the proceeds are treated like any other recovery.
The OCC's Bank Accounting Advisory Series (August 2026), section 2F 'Loan Recoveries,' Question 4, addresses a bank that sells charged-off receivables with a $100,000 contractual balance for $5,000, four months after charge-off, when their cost basis is $0. The staff response: "The sale proceeds should be accounted for as a recovery through the ACL consistent with how the bank had charged off the loan receivables" (OCC BAAS).
Illustrative example (not a price benchmark). The lender sells a pool of charged-off accounts with $200,000 of face value and receives $8,000 at closing. For real pricing data, see the Debt Pricing Guide.
| Account | Debit | Credit | Entry |
|---|---|---|---|
| Cash | $8,000 | Dr $8,000 | |
| Allowance for credit losses | $8,000 | Cr $8,000 |
What changes on the books:
- No gain-on-sale line in this example. The accounts had a $0 carrying amount, and the proceeds go to the ACL.
- Higher ACL, lower future provision. In the call report roll-forward, recoveries add to the allowance, so the provision needed to reach management's estimate is lower, all else equal.
- Related-party sales are different. When a charged-off loan is sold to directors or stockholders above fair value, the BAAS credits the fair value to the ACL as a recovery and the excess to capital surplus; if fair value cannot be determined, the entire price is a capital contribution (section 10E, Questions 2–3).
If you are weighing a sale against an agency, see selling vs. placing on contingency. Banks and credit unions can also read about debt sales for banks and credit unions, and fintech lenders about fintech charge-offs.
What is the direct write-off method for non-lenders?
Businesses that do not keep an allowance sometimes write off a bad receivable directly.
Illustrative example. A distributor decides a $2,500 customer invoice will not be paid.
| Account | Debit | Credit | Entry |
|---|---|---|---|
| Bad debt expense | $2,500 | Dr $2,500 | |
| Accounts receivable | $2,500 | Cr $2,500 |
Two cautions:
- GAAP. ASC 326 covers trade receivables as well as loans, so companies reporting under GAAP generally estimate expected credit losses through an allowance (FASB, ASU 2016-13). The direct method is common in small-business bookkeeping and in tax reporting.
- Recoveries. If a written-off invoice is later paid, a common entry reverses the write-off and records the cash. For tax: Recoveries of debts deducted in an earlier year are income, except to the extent the earlier deduction did not reduce tax (the tax benefit rule, 26 U.S.C. § 111).
When must a bank charge off a retail loan? (FFIEC timing)
The FFIEC's Uniform Retail Credit Classification and Account Management Policy sets maximum time frames for consumer (retail) credit (65 Fed. Reg. 36903, June 12, 2000):
| Situation | Charge off by |
|---|---|
| Closed-end retail loans (for example, auto and installment) | 120 cumulative days past due |
| Open-end retail loans (for example, credit cards) | 180 cumulative days past due |
| Loans in bankruptcy | Within 60 days of notice from the bankruptcy court, or the time frames above if shorter (unless repayment is likely and documented) |
| Fraudulent loans | Within 90 days of discovery, or the time frames above if shorter |
| Deceased borrowers | When the loss is determined, or the time frames above if shorter |
Other rules in the same policy:
- Open- and closed-end retail loans 90 cumulative days past due should be classified Substandard.
- The charge-off should be taken no later than the end of the month in which the time period elapses.
- Instead of charging off the entire balance, loans with non-real-estate collateral may be written down to the value of the collateral, less cost to sell, if repossession is assured and in process.
- Institutions may adopt more conservative internal policies.
The policy says these loans 'should be classified Loss and charged off.' It applies to banks and savings associations; when it was issued, the NCUA said it did not plan to adopt the policy.
Re-aging, which the policy defines as "returning a delinquent, open-end account to current status without collecting the total amount of principal, interest, and fees that are contractually due," is limited. To be considered for re-aging, an open-end account should meet three conditions: "The borrower has demonstrated a renewed willingness and ability to repay the loan. The account has existed for at least nine months. The borrower has made at least three consecutive minimum monthly payments or the equivalent cumulative amount. Funds may not be advanced by the institution for this purpose." Open-end accounts "should not be re-aged more than once within any twelve-month period and no more than twice within any five-year period." For workout programs, an account may be re-aged "only after receipt of at least three consecutive minimum monthly payments or the equivalent cumulative amount," and "re-aging for workout purposes is limited to once in a five-year period and is in addition to the once-in-twelve-months/twice-in-five-years limitation." Institutions may adopt stricter standards (65 Fed. Reg. 36903, June 12, 2000).
How does CECL change charge-offs? (ALLL vs. ACL)
Before CECL, the allowance for loan and lease losses (ALLL) followed an incurred-loss model: losses were reserved when they were probable. FASB's ASU 2016-13 (ASC Topic 326, issued June 16, 2016) replaced it with the current expected credit loss (CECL) model and the allowance for credit losses (ACL).
What CECL changes, per FASB:
- it "eliminates the probable initial recognition threshold";
- it reflects "an organization's current estimate of all expected credit losses over the contractual term" of its financial assets;
- it uses historical experience, current conditions, and reasonable and supportable forecasts.
Effective dates (FASB; deferral in ASU 2019-10):
- SEC filers, excluding entities eligible to be smaller reporting companies: fiscal years beginning after December 15, 2019.
- All other entities: fiscal years beginning after December 15, 2022.
What did not change: charge-offs still reduce the allowance, and recoveries still increase it. Under CECL, expected recoveries can be part of the estimate, but they "may not exceed the aggregate amounts previously charged off or expected to be charged off" (FFIEC Glossary).
How are charge-offs treated for tax? (high level)
- Wholly worthless debts are deductible in the year they become worthless; partially worthless debts may be deducted up to the amount charged off within the taxable year (26 U.S.C. § 166(a)).
- The deduction is limited to adjusted basis (§ 166(b)).
- Banks and other regulated corporations: if a supervised bank charges off a debt in obedience to specific orders of its regulators, or under their established policies (with written confirmation at the next audit), the debt is conclusively presumed worthless to the extent charged off in that year, provided the deduction is claimed on that year's return (26 C.F.R. § 1.166-2(d)).
- Alternatively, a supervised bank may elect the conformity method in § 1.166-2(d)(3): if its regulator has expressly determined that the bank's loan-loss classification standards are consistent with regulatory standards, debts charged off for regulatory purposes are conclusively presumed worthless in the year of charge-off, provided the charge-off results from a specific regulatory order or matches a 'loss asset' classification.
- Recoveries: Recoveries of debts deducted in an earlier year are income, except to the extent the earlier deduction did not reduce tax (the tax benefit rule, 26 U.S.C. § 111).
Book and tax can differ. The CECL allowance and provision are book estimates; for tax, most lenders deduct only specific charge-offs under § 166 (banks with more than $500 million in assets cannot use a bad-debt reserve, 26 U.S.C. § 585(c)). The timing gap is narrower for a bank that has made the § 1.166-2(d)(3) conformity election.
How do charge-offs show up on the call report (Schedule RI-B)?
Banks report charge-offs and recoveries on Schedule RI-B of the FFIEC 031, 041 and 051 Call Reports (FDIC, RI-B instructions for the 031/041 and for the 051):
- Part I, column A: loans and leases charged off against the allowance, calendar year-to-date, by loan category.
- Part I, column B: amounts recovered through the allowance on loans and leases previously charged off. Proceeds from selling charged-off accounts belong here when they are recorded as recoveries.
- Part II: the allowance roll-forward: beginning balance, plus recoveries, less charge-offs, less write-downs on transfers to held-for-sale, plus provisions, plus or minus adjustments.
Federally insured credit unions report charge-offs and recoveries on NCUA Form 5300 rather than the FFIEC call report, in Schedule A, Section 3, "Loan Charge Offs & Recoveries" (totals in Accounts 550 and 551) (charge-offs year-to-date in Account 550, recoveries in Account 551) (NCUA 5300 Call Report Instructions, Sept. 2025).
Net charge-offs (gross charge-offs minus gross recoveries) are the numerator of the net loss rate. The FFIEC's Uniform Bank Performance Report shows it for every bank as "Net Loss to Average Total LN&LS": gross loan and lease charge-offs, less gross recoveries, divided by average total loans and leases, on an annualized basis (UBPR User's Guide).
How does selling a charged-off portfolio affect the books?
Putting the entries together:
- Before the sale, the accounts are already charged off, so they carry no balance on the books.
- At closing, the cash proceeds are credited to the ACL as a recovery (OCC BAAS 2F).
- On the call report, the proceeds appear as recoveries in Schedule RI-B, which lowers net charge-offs for the period.
- For tax, a recovery of a previously deducted debt is generally income, to the extent the deduction reduced tax (§ 111).
- Afterwards, the lender no longer carries the collection, servicing and dispute work for those accounts.
Selling charged-off accounts turns balances already written off into cash, which is booked as a recovery. SellChargeOffs works on the seller's side: we introduce lenders to debt buyers, and we are not a debt buyer or collector. A valuation is an estimated range based on market data, not a bid or offer.
What could your charged-off accounts bring?
Free, confidential valuation: an estimated range based on market data, not a bid or offer. Summary business data only, and a mutual NDA before any documents. No obligation.
Glossary
- Charge-off: Removing a confirmed-uncollectible loan, or part of it, from the books against the allowance.
- Recovery: A collection on a previously charged-off amount, credited to the allowance.
- Recovery accounting: Recording collections and sale proceeds on charged-off accounts as credits to the allowance, capped at the amount previously charged off, with any excess generally recognized as noninterest income.
- Allowance for credit losses (ACL): The CECL-era contra-asset for expected credit losses (ASC 326).
- Allowance for loan and lease losses (ALLL): The pre-CECL allowance under the incurred-loss model.
- Provision for credit losses: The income-statement expense (or reversal) that adjusts the ACL to management's estimate.
- Net charge-offs: Gross charge-offs minus gross recoveries for a period.
- CECL: Current expected credit loss model, FASB ASU 2016-13 (ASC Topic 326).
- Direct write-off method: Expensing a specific bad receivable when it is deemed uncollectible, without an allowance.
- Schedule RI-B: The call report schedule for charge-offs, recoveries and changes in the allowance.
Sources
- FFIEC 031 and 041 Glossary, "Allowances for Credit Losses" (December 2025): fdic.gov
- FFIEC Schedule RI-B instructions (031/041 and 051): 031/041, 051
- OCC, Bank Accounting Advisory Series (August 2026), sections 2F and 10E: occ.gov
- FFIEC Uniform Retail Credit Classification and Account Management Policy, 65 Fed. Reg. 36903 (June 12, 2000): federalregister.gov
- FASB ASU 2016-13 (ASC Topic 326) and ASU 2019-10: fasb.org
- 26 U.S.C. §§ 111, 166, 585 and 26 C.F.R. §§ 1.166-2, 1.6050P-1: § 111, § 166, § 585, § 1.166-2, § 1.6050P-1
- FFIEC UBPR User's Guide, "Net Loss to Average Total LN&LS": cdr.ffiec.gov
- NCUA 5300 Call Report Instructions (September 2025): ncua.gov
Charge-off accounting FAQ
What is the journal entry for a loan charge-off?
Debit the allowance for credit losses and credit loans receivable for the amount deemed uncollectible.
What is the journal entry for a recovery of a charged-off loan?
Debit cash and credit the allowance for credit losses, limited to the amount previously charged off; amounts above that are generally noninterest income.
How do you account for the sale of charged-off loans?
The OCC's Bank Accounting Advisory Series says the sale proceeds should be accounted for as a recovery through the ACL, consistent with how the loans were charged off.
When does a bank have to charge off a credit card balance?
Under the FFIEC Uniform Retail Credit Classification policy, open-end retail credit such as credit cards should be charged off at 180 cumulative days past due, and closed-end retail loans at 120 days.
What is the allowance for loan losses?
The allowance for loan and lease losses (ALLL), now the allowance for credit losses (ACL) under CECL (ASC 326), is a contra-asset that reserves for credit losses in a loan portfolio. Provisions build it, charge-offs draw it down, and recoveries, including proceeds from selling charged-off accounts, add back to it.
What is the difference between ALLL and ACL?
The ALLL was the pre-CECL allowance based on incurred, probable losses. The ACL under ASC 326 reflects all expected credit losses over the contractual term.
Does a charge-off mean the debt is forgiven?
No. A charge-off is an accounting entry, not forgiveness of the debt. The borrower still owes the balance unless it is paid, settled, discharged in bankruptcy or forgiven. Separately, a lender may have to file Form 1099-C when an 'identifiable event' occurs, such as a bankruptcy discharge, an agreement to cancel the debt, or a decision to stop collecting under a defined policy, 'whether or not an actual discharge of indebtedness has occurred' (26 C.F.R. § 1.6050P-1).
Are charge-offs tax-deductible?
Generally yes, under 26 U.S.C. § 166, for wholly worthless debts and, up to the amount charged off, partially worthless debts. Banks that charge off under regulatory orders or policies can get a conclusive presumption of worthlessness under 26 C.F.R. § 1.166-2(d).
Where do charge-offs appear on the call report?
On Schedule RI-B: Part I reports charge-offs (column A) and recoveries (column B), and Part II rolls forward the allowance for credit losses.
Where should you go next?
- How small lenders sell charged-off accounts
- How much debt buyers pay
- TCPA compliance for debt collection
- The e-OSCAR dispute process for furnishers
- Request a free valuation
General information only, not accounting, tax or legal advice. Examples use illustrative numbers. SellChargeOffs works on the seller's side and is not a debt buyer or collector.