Charge-offs (or write-offs) reduce the entity’s recorded investment in the loans. Entities record charge-offs when they determine that the loans are uncollectible, which generally occurs when all commercially reasonable means of recovering the loan balance have been exhausted. Such determination is based on factors such as the occurrence of significant changes in the borrower’s financial position such that the borrower can no longer pay the obligation, or that the proceeds from collateral will not be sufficient to pay the loan.

For smaller-balance pools of homogeneous loans, charge-offs generally occur when a loan's specific past due status is reached. The adequacy of the analysis to determine an allowance for losses for a homogenous pool is largely dependent on the consistency and timeliness of individual account write-offs, and adjusting the analysis for the estimated time lag between the incurred event and the write-off.