Should I Pay a Charge-Off in Full or Settle?

Confused about charge-offs? Learn the pros and cons of paying in full versus settling your debt. Discover your path to credit recovery.

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Borrowers who’ve gotten themselves tangled in a charge-off situation face difficult choices. Pay the debt in full? Try to settle for a lesser amount? Run away and hide?

“The world of charged-off debt can be tricky and complex,” says Erika Kullberg, attorney, founder of, and host of the podcast, Erika Taught Me. “Your decision on how to handle it can significantly impact your financial future. It can affect your credit score, financial stability, and have potential legal ramifications.”

As Kullberg makes plain, if you’re facing charge-offs, you’ve already damaged your credit ratings; how you move forward can secure or shatter your financial foundation for years to come.

What Is a Charge-off?

Consumers whose budgets, for whatever reason, have gone sideways, sometimes run into far worse trouble than simply not being able to make ends meet. Debts go into collections, collections go unsatisfied, and, after a while — usually six months — here it comes, like a freight train burning Benjamins, the dreaded charge-off.

The charge-what? Glad you asked.

A charge-off is an accounting maneuver executed whenever a lender concludes a debt is uncollectible. The borrower has fallen well behind on payments and attempts to collect have proven unsuccessful.

Do not confuse a charge-off with debt forgiveness. Despite the sound of the term, borrowers with charge-offs remain legally on the hook.

Indeed, the lender retains a keen interest in recovering at least some of what is owed. One option is to peddle the charged-off balance to a third-party collection agency. When that happens, the collections process begins anew. For the beleaguered borrower, it’s out of the frying pan, into the fire.

It’s vital that borrowers snagged in charge-off situations understand their predicament (it’s bad) as well as their options (not 100% bleak).

Impact of a Charge-Off on a Credit Report

A variety of factors comprise a consumer’s credit score, but the largest of these is payment history (accounting for 35%). Failure to repay a loan or credit card balance — the upshot of a charge-off — can cause your credit score to plummet.

“A charge-off is considered a serious negative event,” says Rod Griffin, Senior Director of Public Education and Advocacy at Experian. “It has a significant impact on a consumer’s credit score and potentially their ability to borrow funds or open a credit account in the future.”

In short, you’ll have trouble scoring fresh credit (personal loans or credit cards); moreover, lenders who do approve your applications almost certainly will charge higher interest rates and offer lower credit limits.

Paying a Charge-Off in Full

In a perfect world, repaying charged-off debt in full is the best course of action. Assuming your budget is strapped, and you haven’t simply been neglectful about a pile of cash in savings, options that can set you right are still available.

Oftentimes, borrowers facing a charge-off apply for a debt consolidation loan, or, if they qualify, a zero-interest balance-transfer credit card.

Another possibility: Consult a nonprofit credit counseling agency. Credit counselors can provide guidance, insight and coaching, as well as develop a debt-management plan that may reduce interest on the debt to manageable means.

“Seeking professional guidance,” says influencer Kullberg, “such as credit counseling or legal advice, can provide unique and valuable insights into your options and help you navigate the complexities of charged-off debt. Some of the benefits include expert negotiation skills, knowledge of consumer protection laws, and tailored strategies to address your specific financial circumstances.”

Pros of Paying in Full

Paying debts in full is the quickest road to recovering your financial health. Your credit score will begin to rebound in a comparatively short time (about two years). And your relationship with Uncle Sam’s tax collectors —  something we haven’t talked about yet — will improve.

Dodging lending institutions or repaying just a fraction of what you owed in a settlement triggers tax consequences. Debtors who settle a $10,000 balance for, say, $6,000, will owe taxes on the $4,000 difference.

Also, among the benefits of paying in full: You’ll be more likely to persuade the lender to remove the charge-off from your credit report (aka “pay for delete”).

Cons of Paying in Full

Committing to paying off a charged-off debt in full may be a pipe dream if your life has become a jumble and your budget is in tatters. In the short run, the chief downside to paying the entirety of a charged-off debt is the fresh strain it will put on your already tight finances.

“Budgetary constraints are real,” says True Tamplin, founder of “Consider smaller, consistent payments. Remember, even partial payments show good faith and can improve your credit over time.”

Settling a Charge-Off

In contrast to paying in full, settling a charge-off means persuading the lender to accept a fraction of the balance as a final payment. Borrowers hoping to achieve a settlement contact the lender, verify the amount owed, and attempt to negotiate an acceptable middle ground.

Customarily, settlements are paid in a single lump-sum payment; however, borrowers may be able to score a reduced-payment plan.

Once the negotiated amount is paid, whatever remains of the original balance is forgiven. The borrower’s credit report should be updated to indicate the debt is “settled in full”, which will remain in the credit report for seven years.

Pros of Settling

The primary upside of a settlement is the borrower saves money by paying only a portion of the balance owed. If you simply cannot afford to pay the debt in full, negotiating a settlement could be your next best option.

Being able to negotiate a settlement amount also can result in a speedier debt resolution, paving the way to begin reconstructing your credit score.

Just as in paying-in-full, your negotiation can (and should) include discussing the removal of the charge-off from your credit history. While rare, pay-for-deletion does happen.

Cons of Settling

The chief downside of a settlement is the injury done to your credit report. While settling a debt is better than attempting to dodge it altogether, a “settled” status remains a bruise on your report; it identifies you as someone who could not, or would not, meet your obligations under the original terms.

As noted earlier, settling can have unpleasant tax consequences. Forgiven debt is reported to the IRS as regular income, and must be accounted for on your Form 1040.

Here again, you may need outside counsel, either a debt-relief lawyer, a tax attorney, or a nonprofit credit counselor, to walk you through the process.

Pay in Full or Settle?

Borrowers who can scrape together the wherewithal to pay their balances in full will reap the benefits of an improved credit score and, all things being equal, a speedier financial recovery.

As noted above, entering into a settlement also has its benefits: less budget strain and potentially speedier resolution. But the downsides — credit score havoc, tax consequences, having to consult an expert — are sobering.

Consequences of Not Handling Charge-Offs

What the borrower saddled with a charge-off absolutely must not do, is turn their backs on the situation. Ignoring a charge-off is not a solution; most likely, neglect will merely make things worse.

Ramifications of failing to confront a charge-off include:

  • Ongoing collection efforts: Again, charged-off does not mean forgiven. The original creditor or collection agency can, and probably will, continue to pursue collection efforts. This means phone calls (at home, on your mobile, at work); letters and email; contacting friends, family and neighbors to verify the borrower’s contact info; and even showing up at the debtor’s home.
  • Legal action: The borrower may be sued for the outstanding balance, leading to wage garnishment and frozen bank accounts.
  • Credit score damage: A charge-off not only causes immediate wreckage to a consumer’s credit history, it also sticks on the credit report for seven years from the date of the first missed payment. Because payment history is the most heavily weighted consideration in credit score, the impact won’t recede if the debt stays unpaid.
  • Trouble obtaining new credit: A charge-off plus a series of missed payments is a red flag for lenders weighing your credit worthiness. Getting approved with bad credit can mean higher interest rates and fees, lower credit limits, and possibly even having to put up collateral.

“Ignoring charged-off debt might seem easier,” Tamplin says, “but it’s a ticking time bomb for your finances. It can damage your credit score, lead to lawsuits, and even impact future job prospects. Taking action, even if it’s not easy, can prevent those dominoes from falling.”

Navigating Your Financial Path

In summary, when it comes to tackling charge-offs, there is no simple solution. Instead, there is only the best solution for the individual debtor, the one that most closely suits the debtor’s resources, timeline, and temperament.

On the other hand, there clearly is a single worst solution, and that’s attempting to ignore the charge-off. Knowing which is the path to avoid leaves the other two options — paying in full or settling the debt — and the means available to achieve either.

Maybe debt consolidation is best. Maybe it’s getting into a debt management program. Maybe it’s debt settlement.

“If a person has charged-off debts … it will take time to rehabilitate their credit history and credit scores,” Experian’s Griffin says. “They should focus on repaying not only the charged off debt but also ensuring payments are made on time for any other outstanding debt they have to avoid more damage to their credit.”

That’s why getting started correctly is vitally important. Consulting with an expert at a nonprofit debt counseling agency could be the best first step.

“While it’s possible to navigate charged-off debt independently,” says Emma Collins, CEO of New York City-based, “professional guidance can offer tailored strategies, negotiation expertise, and peace of mind. Experts can help mitigate the downsides and navigate the complexities of tax implications, ensuring a more favorable outcome.”

Better still, consultations with nonprofit counselors are free and without obligation. Their guidance may prove priceless.

About The Author

Bill Fay

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].


  1. McGurran, B. (2021, April 16) Is It Better to Pay Off Debt or Settle It? Retrieved from