Making payments late or missing payments completely spells bad news for your credit rating. When you miss too many payments, your creditor may charge off the debt. When your debt is charged off as a bad debt, don’t fool yourself into thinking it goes away.
A charged off debt can lead to harassing phone calls, garnished wages, and a major drop in your credit score. But what is a charge-off, and how much does it impact your credit if your balance is charged off as bad debt? Find out more below, including what you can do about charge-offs on your credit report.
What Is a Charge-Off?
A charge-off occurs when you don’t pay the full minimum payment on a debt for several months and your creditor writes it off as a bad debt. Basically, it means the company has given up hope that you’ll pay back the money you borrowed and considers the debt a loss on their profit-and-loss statement. The creditor closes your account, which could be a personal loan, credit card, revolving charge account, or another debt you’ve failed to pay as promised, and it’s charged off as a bad debt.
If you make payments that are less than the monthly minimum amount due, your account can still be charged off as bad debt. You must bring your account current to avoid it being charged off. Once your debt is charged off, your creditor will send a negative report to one or more of the credit reporting agencies. It may also attempt to collect on the debt through its own collection department, by sending your account to a third-party debt collector, or by selling the debt to a debt buyer.
When Will a Charge-Off Happen?
Charge-offs typically don’t happen until your payments are severely late. When you start missing payments, creditors will first send letters reminding you of your past-due bill. If that fails, they move on to the collections process. The standard time for creditors to perform a charge-off is after 120 to 180 days of nonpayment.
How Does a Charge-Off Work?
A charge-off occurs when you don’t pay the full minimum payment on a debt for several months and your creditor writes it off as a bad debt. Basically, it means the company has given up hope that you’ll pay back the money you borrowed and considers the debt a loss on its profit-and-loss statement.
When a charge-off occurs, some of the following happens:
The creditor writes the debt off its books.
The creditor closes any open accounts. You’re not considered a customer in good standing and may not be able to open new accounts with that creditor.
The creditor reports the closed account and the charge-off to the credit bureaus. This can have a negative impact on your credit.
The creditor may sell the balance to a collections agency, which can pursue you for the debt and list the balance as a new collections account tradeline on your credit report. This is an additional negative item on your report.
Does Charged Off Mean Your Debt Is Paid Off?
Charged off doesn’t mean your debt is forgiven. Don’t be misled into believing that because the creditor wrote off your balance that you no longer need to pay the debt.
Even when a company writes off your debt as a loss for its own accounting purposes, it still has the right to pursue collection. This could include suing you in court for what you owe and requesting a garnishment of your wages. Unless you settle or file for certain types of bankruptcy—or the statute of limitations in your state has been reached—you’re still responsible for paying back the debt.
When Do Bad Debts Get Charged Off?
Charge-offs typically don’t happen until your payments are severely late. When you start missing payments, creditors will send letters reminding you of your past-due bill. If that fails, they move on to internal collections processes.
It can take months for debt to be charged off, though this isn’t a guarantee. Some creditors may charge off accounts earlier. Reaching out to your creditor as soon as you know you may struggle to make payments can help you find a resolution that avoids charge-off.
Can You Get Sued for Charged Off Bad Debts?
Yes, you can still get sued for a debt that’s been charged off. While a charge-off zeroes out the balance on the creditor’s books for accounting purposes, it doesn’t zero out your debt or equate to debt forgiveness. You still technically owe the money. The original creditor just needs to take care of its books and may not have the resources to keep trying to collect the debt.
Typically, charged-off balances are sold to third-party debt collection agencies or handed off to in-house collections departments or debt collection partners. These debt collectors are now tasked with collecting the debt, and they usually have a legal right to pursue the debt through a lawsuit.
What to Do If You Have a Charge-Off
You may find out you have a charge-off in a few ways. The original creditor or the collections agency associated with the debt might notify you. Or, you might check your credit report and see that an old account has been charged off.
In some cases, you may not even realize you owe a debt before you see the charge-off on your credit report. One example of how this might happen is when you’re dealing with a number of medical debts and don’t realize you’ve missed one.
However you find out about a charge-off, here are some steps you might want to take when you discover one:
Make sure you understand the answer to the question, “What does charged off as bad debt mean?” Reviewing the information above is a great start, and you can also contact the original creditor to learn more about the debt and why it was charged off.
Validate the debt. Don’t take a collection agency’s word for it. Send a debt validation letter requesting more information about the debt. If the collection agency can’t provide validation, they can’t continue to collect the debt.
Dispute the charge-off. If the charge-off information on your credit report seems incorrect, consider sending a dispute letter. The credit reporting bureau will look into the matter and must remove the information from your credit report if it’s not substantiated. This can help protect your credit.
Negotiate a settlement. Work with the collection agency or the original creditor to negotiate a settlement so you can pay the debt.
Is a Collection or a Charge-Off Worse?
Like other negative items, a charge-off can stay on your credit for up to around seven years. A collection account listed on your credit report can also stick around for that long, though in cases of medical debt, paid collections accounts typically come off your report.
Both of these negative items are bad for your credit. However, by the time you get to charge-off or collections, you’ve probably missed a good number of payments. Your credit has already taken a substantial hit because of those late payments.
Because charges-offs and collections often go hand in hand, they tend to both show up on your credit reports around the same time. However, when you can demonstrate that you did, in the end, manage to pay what you owed, that can reflect better on you when lenders review your credit report.
The bottom line on this topic is that it’s always best to make your payments on time and as agreed. Life does happen, though, and if you think you may miss payments, it’s better to reach out to creditors and try to work something out than ignore the problem and let your account be charged off and sent to collections.
How Does Charged Off Debt Affect Your Credit Score
Charge-offs affect your credit report because they’re caused by missed payments. FICO research indicates that a single late payment negatively impacts your credit score. Missing a payment by 90 days can drop your score over 100 points—but missing it by just 30 days can also have a significant negative affect on your score.
Because a charge-off results from missing payments, you have both the late payments and a charge-off listed on your credit report. Even with good credit, a single charge-off lowers your credit score substantially. Late and delinquent payments have the largest impact on your credit score because up to 35% of your score is determined by your payment history. A lower credit score can cause higher insurance rates, larger housing and utility deposits, increased interest rates and denials for new loans and credit cards.
How Long Does Charged-Off Debt Stay on Your Credit Report?
Just like late payments, a charged-off debt stays on your credit report for seven years. The seven-year clock starts on the date of the last scheduled payment you didn’t make and doesn’t restart if the debt is sold to a collection agency or debt buyer. Paying the charged-off amount won’t remove it from your credit report. The account’s status is simply changed to “charged-off paid” or “charged-off settled,” which remains on your credit report until the end of the seven-year period, when it automatically falls off your report.
How to Remove a Legitimate Charge-Off from Your Credit Report
The only way to have a legitimate charge-off removed from your credit report before the seven-year period expires is to convince the original reporting entity to do so. That’s typically the creditor that wrote the debt off.
While this tactic is hit or miss, success can mean a major positive for your credit report. And even if you’re not successful, you can still get a bit of a bump in your credit history by paying off charged-off debt. Here’s how it works.
You need to have enough money to negotiate with. Before you start negotiating, determine how much you can realistically pay and how soon you can pay it. If you can pay in full right away, you have more leverage to have the charge-off removed you’re your credit report, but you can also ask if they’re willing to make payment arrangements Consider saving up money or taking out a debt consolidation loan.
Once you have enough money to negotiate, contact the original creditor. Make sure you’re speaking to someone who has the authority to negotiate with you and make agreements about actions on your credit report.
Let the creditor know how much you can pay and that you’re able to make the payment today in exchange for calling the debt paid off and removing the charge-off from your credit report.
Get any agreement in writing from the creditor before you make a payment.
If the creditor won’t delete the charge-off from your credit report but does agree to settle your debt for less than you owe, consider the offer. Make sure they agree to mark the charge-off as paid-in-full on your credit report. That shows future creditors that you did make an effort to pay your debts and can be a critical requirement if you ever apply for a mortgage.
How to Dispute a Charge-Off on Your Credit Report
Sometimes, the charge-off on your credit report isn’t accurate. Perhaps you never owed the debt to begin with or you did pay it, and the profit-and-loss write off is a clerical error. You can work to get such items removed from your credit report by challenging them and asking the creditor to verify what they reported. Write a dispute letter yourself or work with a credit repair company to request verification of the charge-off.
When you sign up for ExtraCredit®, you get exclusive discounts to reputable credit repair services—plus access to 28 of your FICO scores from all three credit reports and additional features.
How to Avoid Balances Being Charged Off as Bad Debt
Even better than working to settle a debt and potentially get a charge-off removed is avoiding the issue in the first place. The ideal time to act is as soon as you see you’re struggling to make regular payments. Waiting until items are charged off as bad debt means your credit score will take numerous hits as you miss payments.
But if you can’t pay your debts, what choice do you have? Turns out you have many options, including some of the ones summarized below.
Apply for a debt consolidation loan that lets you bring several debt items under a single account. You may be able to qualify for more favorable terms that reduce the amount you pay each month to make it easier to manage your debt. But this is more likely before your credit score drops due to missed payments and charge-offs.
. If the debt you’re struggling with is credit card related, apply for a balance transfer card. If you can get approved for a card with a 0% APR offer, you may reduce how much you have to pay each month and make it easier to pay down your debts.
Most creditors have programs designed to help account holders who are experiencing emergency financial situations. As soon as you know you can’t pay your bills, call the customer service line for your account and ask if there are programs you can apply for to modify your loans or seek other assistance. Just make sure the new agreement you make is possible with your budget.
Take Charge of Your Debt
The worst thing you can do is ignore debt you owe. It won’t go away, and things get progressively worse for your credit history and score when you let them fester. So, check out your free Credit Report Card today to see where your credit is falling short and start looking for ways you can realistically handle debts that you owe to improve your credit in the future.
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