What Are Charge-Offs?
If you are struggling to make payments on credit accounts, receiving a message like this – “Your account has been charged off!” – might sound like the answer to your dreams.
It is not. In fact, just the opposite is true.
The term “charge-off” means the business that gave you the loan, typically a card company or retailer, has written off the amount owed as uncollectable, closed your account, and declared it a loss.
But you still owe the debt. And there will be considerable damage to your credit score.
That is the ominous dark cloud that hovers over people who can’t keep up with their bills or just refuse to pay them. When consumers don’t pay on an account for 180 consecutive days, lenders can choose to charge-off the account.
When that happens, the lender reports it to the three major credit reporting agencies —Experian, TransUnion, and Equifax — and it becomes part of your credit report for seven years, even if you pay off the balance before then.
In other words, if you pay off the debt two years after it was charged-off, the negative impact remains on your credit score for another five years, making it difficult to get a mortgage, auto loan, or even a debt consolidation loan.
What Do I Do When My Account Is Charged-Off?
When an account is charged-off, you still owe the debt and it can be collected by the original creditor or by a collection agency.
The original creditor might make an attempt to recover it, but usually hires a collection agency to go after the debt. Even more frequently, the creditor sells the debt (usually for pennies on the dollar) to the agency and steps away from the matter altogether.
Once you receive notice that your account has been charged-off, there are several options available:
- Find a way to resolve the debt with the original creditor or collection agency
- Enroll in a Debt Management Plan
- Attempt a debt settlement for less than the amount due
- Do nothing and wait seven years for the account to be removed from your credit report
Make a Plan to Pay Off Debt
The best option is to resolve the debt with the original investor. Ideally, you would somehow come into enough money to pay off the debt in full. If this happens, be sure your credit report reflects that the debt was paid in full.
Failing that, you should contact the creditor directly or hire an attorney to negotiate a resolution that both sides can live with.
Know how much a month you can afford before starting this process. Only agree to pay what you can reasonably afford each month. When you are finished negotiating and are satisfied with the agreement, ask to see it in writing and have the creditor/collection agency sign it. Never send money before seeing a signed agreement, especially when dealing with a collection agency.
Often a debt will be sold from company to company. Debt collection agencies can buy and sell debts without notifying you, so make sure you send the payment to the correct company. If you are unsure, you can always request verification that the debt indeed belongs to the company.
DMP Could Help Charge-Offs
If trying to deal with charge offs is overwhelming you, it might be wise to find a non-profit credit counseling agency and ask for help there. The credit counselors can help you better understand how to manage your money, set up a budget, and, if it helps provide a solution, enroll you in a debt management program (or DMP).
A DMP is an agreement to pay off the debt in full over a period of time that is agreed upon by both sides. The credit counseling agency might be able to convince the lender to reduce their interest rates, get late fees and other penalties reduced, and thus make it possible for you to solve the problem in a 3-to-5 year time frame.
Once you have paid off the entire amount, you can ask the credit bureaus to change the account status to: paid in full, balance zero. The account will still show that it was charged-off for seven years, but your credit score will improve and future lenders will look more favorably at your status.
Debt settlement is another option, but one that carries severe risk. Debt settlement is when a lender agrees to settle an outstanding debt for less than what is owed — sometimes significantly less. Some lenders won’t deal with debt settlement agencies.
Another negative to consider in a debt settlement is that if some portion of your debt is forgiven or canceled, you may have to report that amount as “income” and pay the appropriate taxes.
Finally, credit scores suffer — sometimes even dramatically — from debt settlement. It is a way out, but consider alternatives like debt consolidation and DMP before making a final decision.
Statute of Limitations
The “do nothing” approach means you have surrendered. The information that you failed to pay a debt sits on your record for seven years. It is very unlikely you would be extended any credit during that time.
The good news from that is that there is a “statute of limitations” in every state that says debt collectors can’t sue you in court over a debt after a certain amount of time. That statute of limitations varies from state-to-state, but is generally somewhere between 3 and 6 years. Collection agencies can still try to collect on unpaid debts, but if there is no court judgment against you, there is no way to force you to pay. The debt is essentially uncollectable.
So while your credit report and score will have the stain of a charge-off on it for seven years, the debt itself could be gone after six.
And be sure to get your free annual credit report from each of the three credit bureau reporting agencies to make sure your account doesn’t inaccurately reflect a charge-off that never happened. Mistakes like that do happen, but only you can catch it and dispute it.
Can Charge-Offs Hurt Your Credit Rating?
Charge-offs can have serious and damaging effects on a borrower’s credit rating and credit score.
A charged-off account will be reported to the major credit rating bureaus and remain on your credit history for seven years, making it difficult for you to get new credit for a long time. It is a red flag to potential lenders and suggests that you have ignored your financial obligations, as well as the opportunity to negotiate a suitable solution with a previous lender.
That is why it is advisable to try and settle a credit card debt before you have defaulted on your account and it is charged-off. Settling your credit card debt for less than you owe will require you to call your credit card customer service department and ask to speak to someone in the settlements department. You will need to explain your situation and let the person know that you would like to settle the account with the amount of cash you believe you can afford.
While it is possible that your credit card issuer will refuse to accept a partial settlement of your debt, it is just as likely that you may be allowed to settle for either a lump sum payment, a renegotiation of your payment terms that may give you more time — typically an extra 90 days — or a combination of the two, in order to settle your account before it gets charged-off.
In fact, many of the major credit card issuers like Bank of America, Chase, Citibank, Capital One, and Discover allow pre-charge-off settlements combined with payment terms to help with your credit card debt.
For example, suppose you owe $5,000 on your credit card and your bank allows you to settle the debt for $2,400, but you’re entering your fifth month of missed payments. In order to forestall a charge-off, the bank will also extend the time you need to retire the loan by having you agree to pay $800 a month for the next three months – two months longer than the typical 180 days before an account is usually charged-off.
However, once you agree to the new payment terms, you must adhere to them, because you will not be given any extra leeway.
Can I Fix My Credit Score?
A charged off account will have a lasting effect on your credit score unless you have it removed from your credit report. This will take some work, and it’s not always successful.
Pay to have it deleted
Your first option is to request the charge-off be removed from your credit report in exchange for agreeing to pay the debt. You can either pay in full or set up a repayment plan, but first make sure you get an agreement in writing that the creditor will have it deleted from your credit report.
Dispute the charge-off with credit bureaus
The Fair Credit Reporting Act gives you the right to dispute inaccuracies on your credit report by sending a letter to the credit bureaus. Check to make sure the balance is correct. The balance with the original creditor must be zero if they have sold it to a debt collector. If not, it will factor into your credit utilization. Also, double-check dates for late-fee penalties. Once a dispute is made, the credit bureau gives the debt collector 30 days to verify the debt.
Goodwill adjustment letters are used to remove late payments from credit reports citing a personal hardship. It’s worth a shot using one to remove a charged-off account from your credit report. Your chances are higher if you’ve been a model customer and had an unexpected hardship like medical bills or loss of a job. A goodwill adjustment might also be used to correct an honest mistake. Maybe you moved, forgot to change your address and never received the bill. If you fix your error by negotiating a payment, the credit bureaus may see that as cause for a removal.
If all else fails, you’ll have to be patient. Charged-off accounts stay on a credit report for seven years, but their impact on your credit score will diminish over time, becoming almost insignificant by the fifth year. Continue to pay all bills on time, and your score will recover.
The Pros and Cons
The major advantage of settling before charge-off is that your credit rating will not be as negatively impacted as it would be if you wait too long before dealing with your delinquent account. In addition, banks are generally easier to work with than collection agencies.
If your account is charged-off and sold to a collection agency, you generally will have to cope with their more aggressive tactics. If your account is sold to an attorney, you risk getting sued.
The potential drawbacks: you might pay more to settle with a bank than with a bill collector, and you will have less time to come up with the settlement money. Also, some banks will not work with debt settlement companies, but only directly with you to settle a debt before charge-off. If you are working with a debt relief firm, make sure you first ask your creditor about its policies.
In most cases, however, it is still advisable to settle your credit card debt before it is charged-off.
Max Fay is an entrepreneurial Millennial whose thoughtful writing shows he has a keen eye on both. Max has a genetic predisposition to being tight with his money and free with financial advice. At 25, he not only knows what an “emergency fund” is, he already has one. He wrote high school and college sports for every major newspaper in Florida while working his way through Florida State University. That experience was motivation to find another way to succeed financially and he has at Debt.org. Max can be reached at firstname.lastname@example.org.
- Consumer Financial Protection Bureau (2017 February 10) Debt Collection. Retrieved from https://www.consumerfinance.gov/ask-cfpb/what-is-the-best-way-to-negotiate-a-settlement-with-a-debt-collector-en-1447/
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- Sekar, A. (2015, April 7) 4 Things to Expect When Your Credit Card Debt is Charged Off. Retrieved from https://www.nerdwallet.com/blog/credit-cards/credit-card-debt-charged-off/
- Keefer, A., ND. How to Pay Off Charged-Off Debt. Retrieved from http://budgeting.thenest.com/pay-off-charged-off-debt-3571.html
- NA, (2015, November 2) The Mortgage Forgiveness Debt Relief Act and Debt Cancellation. Retrieved from https://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation