Charging off a Loan
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A charge-off loan is a delinquent loan that the credit union will take a loss on. There are two methods to handle charge-off loans on the system:
- Charged-off loans that remain on the system with a charged-off status.
- Charged-off loans that do not remain on the system and are kept with manual records.
Loans that remain on the system with a charge-off date will not be reported on the Delinquency Report 430.
General Ledger Effects
On the general ledger at a credit union, loans made by the credit union are assets and carry positive balances. The general ledger (GL) account number used by credit unions for their loans is within the 701000 - 701999 general ledger account series. The following table shows how a debit and credit apply to loans:
| Debit | Credit |
|---|---|
|
A debit is a new loan and increases the balance. |
A credit is a payment to an existing loan and reduces the balance to the GL Loans account. |
The NCUA requires that credit unions set aside a portion of their total amount of outstanding loans in an Allowance for Loan Losses account, which is a contra-asset account. The Allowance for Loan Loss general ledger account number is 719000.
The Loan Loss general ledger account 719000 carries a credit (negative) balance. GL account 719000 should never have a debit (positive) balance. The following table shows how credits, debits, and a zero balance affect the Loan Loss general ledger account 719000.
| CU Adds Money | CU Charges Off a Loan | Low or Zero Balance |
|---|---|---|
|
Debit increases account balance |
Credit lowers account balance |
CU must add money to GL account 719000 to bring it back to a credit balance |
Processing Rules Setup
The following processing rules must be established to use the Loan Charge Off dialog box:
- The charge-off loan type must exist on the Loan Profiles - Account Information tab.
- The Charge-off Loan Type check box must be selected on the Loan Profiles - Account Information tab if the total of the charged-off loans is to be separated from the other loan totals on the Trial Balance Reports 410 and the Selective Trial Balances Reports 411 and 413-417.