Everything You Need to Know About a Charged-off Debt

Updated: Apr 19

Published by Aug. 15, 2019 at 5:04 a.m. ET

By Lacey Langford

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 at home and work, garnished wages and a major drop in your credit score. Understanding what “charged off as bad debt” means and the impact it has on your credit report helps you get your credit back on track.

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. Once the creditor writes off your debt, they either sell or transfer your delinquent account to a collection agency or a debt buyer. By the time your account is charged off as a bad debt, your credit score has already suffered significant damage. Having an account charged off as bad debt is one of the worst items you can have on your credit report, and it can affect your credit for years.

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 you no longer need to pay the debt. As long as your charge-off remains unpaid, you’re still legally obligated to pay back the amount you owe.

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 on your wages. Unless you settle, 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.

How soon will a charge-off happen?

Charge-offs typically don’t happen until your payments are severely late. When you start missing payments, creditors 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 180 days of nonpayment, but installment loans may be charged off after 120 days of delinquency.

If you were making payments that were less than the monthly minimum amount due, your account can still be charged off as a bad debt. You must bring your account current to avoid having it charged off. Once your debt is charged off, your creditor sends a negative report to one or more 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.

How does a charged off as bad debt affect your credit report?

Charge-offs affect your credit report because they’re caused by missed payments. Fico FICO, +3.07% research indicates that a single late payment impacts your credit score. Even making late payments on accounts with small monthly amounts can drop your score by as much as 100 points, and it can take three years to recover from the damage.

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 do you remove a charge-off from your credit report?

The only way to remove a charge-off from your credit report before the 7-year period expires is to contact the original creditor to negotiate to have it removed after you pay off the debt. You have a better chance of success if you have a large chunk of money available to pay on the debt. Before you make contact, 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 from your credit report, but you can also ask if they’re willing to make payment arrangements.

READ: Is a personal loan the best way for you to tackle debt?

If the account has already been sent to a third-party collection agency, this agency can’t remove the charged off as bad debt mark from your credit report. You must speak directly with the original creditor about removal, and the person you talk to must have the authority to remove the charge-off from your report. Always remain polite and professional while speaking to your creditors and never provide them with any excuses why you weren’t paying before. If the creditor agrees to remove the charge-off, always get the agreement in writing.

What should you do if you have a charge-off?

The best thing to do if you have a charge-off is to pay the balance in full and settle the debt. If you can’t convince the original creditor to remove the charge-off from your credit report, your report shows “charged-off paid,” which proves you’re trying to resolve the negative account. If you’re unable to pay the debt in full, create a budget to find extra money to pay down the debt quicker. Pay your other debts on time each month to improve your credit report.

How do you avoid charge-offs?

Take preventive measures to avoid having any of your accounts charged off as bad debts. The further you get behind on your payments, the harder it is to get caught up again. Learn and maintain positive financial habits, and avoid living above your means. Check into automating your finances to ensure you don’t miss any payments, which puts you at risk for getting charged off.

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If you foresee problems making any of your payments, contact your creditor right away. Some companies are willing to make payment arrangements that let you avoid a charge-off, especially if they believe they won’t be paid otherwise. If you’re having serious financial trouble, some creditors may also offer a hardship payment plan that lets you temporarily make reduced monthly payments.

Take charge of your debt

It’s always best to do everything possible to ensure charge-offs never appear on your credit report by avoiding situations that would cause an account to be charged off as a bad debt. Always ensure you’re paying all your accounts as agreed, and never allow your payments to become late. Remember, you’re still responsible for paying off the debt even if it’s been charged off, which may require making payments to a third-party collection agency or debt buyer instead of the original creditor. Your credit score will definitely suffer from a charge-off, but you can help improve your score by paying off the past due debt and paying your other credit account balances on time to keep everything else in good standing.

If you’re in debt and feel like you have nowhere to go, there are numerous debt management programs that educate you on what you need to do to begin digging yourself out of debt and rebuild your credit. Don’t forget, you can check your credit reports free from all three major credit bureaus every year to make sure everything is accurate and all payments are being recorded correctly. See published article.

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