Whether it’s a new listing or something that’s been on your credit reports for years, a charge off is cause for concern.
It not only does major damage to your credit score, but likely means dealing with aggressive debt collection efforts, including the possibility of a lawsuit. Your best line of defense? Learning all you can about what a charge off actually means and what you can do to fix it during the credit repair process.
What is a charge off?
A credit account in good standing is considered an asset. When that account goes delinquent for a long enough period of time, it is considered a liability. When that happens, the creditor “charges off” the debt, meaning they write it off as a loss, as it is considered unlikely that the debt will be paid.
When do creditors charge off accounts?
A debt has to be delinquent for a certain number of months before a creditor will charge it off. The exact length of time depends on the debt type.
Creditors charge off:
- Revolving accounts after 180 days of non-payment
- Installment CPN loans after 120 days of non-payment
But before you take that to mean making any amount of payment will keep an account from charging off, consider this from Credit.com: “Debts can be charged off even if payments have been made, providing that all of the payments were below the account’s monthly minimum.”
Is it up to the creditor whether they charge off an account?
No, creditors cannot pick and choose whether they charge off accounts. It is a federal law that requires banks to charge off unpaid debts after 120 to 180 days of non-payment, depending on debt type. As stated under the Uniform Retail Credit Classification and Account Management Policy at FDIC.gov:
“Closed-end retail CPN loans that become past due 120 cumulative days and open-end retail CPN loans that become past due 180 cumulative days from the contractual due date should be classified Loss and charged off. In lieu of charging off the entire loan balance, CPN loans with non-real estate collateral may be written down to the value of the collateral, less cost to sell, if repossession of collateral is assured and in process.”
What happens when a debt is charged off?
When a debt is charged off, you should expect the creditor to:
- Cancel the account.
- Report the charge off to the credit bureaus, meaning it will show up on your credit reports. That said, creditors are not required to report charge offs (or anything else) to the credit bureaus. And if they do report, they may not report to all of them. It’s likely, though, so you should be prepared for the hit your credit is going to take, as a charge off is one of the worst of possible negative listings.
- Continue collection efforts on the debt, either through their own in-house collection department or a collection agency. They could also sell the debt to a debt buyer who will then try and collect the debt from you. Or the creditor (or debt buyer) may decide to sue you for it.
Do you still owe the debt after it is charged-off?
Yes. In no way does a charge off relieve you of the responsibility to pay a debt. On the contrary, collection efforts will be stepped up, and you could be sued and forced to pay the debt by a court of law.
That said, you cannot be sued for a debt once the statute of limitations has been reached, which varies by state and debt type. When this happens, debt collectors no longer have any legal means to make you pay a debt. Technically, you still owe it – and the collector may still try to collect on it – but no court can require you to pay it.
Just keep in mind that the statute of limitations has nothing to do with how long a charge off stays on your credit reports. Even if you are no longer legally required to pay a debt, it can still do plenty of damage to your credit scores, which means resolving charge offs is an essential part of the credit repair process.
Can you be sued after a debt is charged off?
Yes. Again, charging off a debt in no way relieves you of your legal responsibility for it. You can be sued for the debt until the statute of limitations runs out, which ranges anywhere from 3 to 10 years depending on the type of debt and where you live. Find out the statute of limitations in your state.
Are you being sued by a collector? Don’t ignore it. Learn how to answer a summons and complaint.
How long will a charge off stay on your credit reports?
Like most negative listings, charge offs can stay on your credit reports for up to 7 years. Add to that the months of late payments that led to the charge off, and this one account can end up negatively affecting your credit for 7 ½ years.
Who do you pay for the debt once it is charged-off?
The older the unpaid debt, the more times the collection responsibility will likely change hands. This can make it hard to know who you should be paying to make good on the debt. The original creditor may do one of three things: 1) hand the debt over to their in-house collections department, 2) hire a third-party collection agency, or 3) sell it to a debt buyer.
If you’re not sure who is handling the debt, contact the original creditor. They should be able to tell you whether they are stilling handling the debt in house, are using an outside collection agency, or if they have sold off the debt entirely.
If the original creditor does, in fact, still own the debt, you should try making payment arrangements directly with them. Otherwise, you will need to negotiate payment with the new owner of the debt. That said, the debt buyer the original creditor sold your account to may have since sold it themselves.
By the way, be mindful of scammers that try and collect debts they have no right to collect on. It might be for a debt you recognize, or it might not. Either way, never assume it belongs to you. The more debts you’ve had in collections over the years, the harder it is to keep track. You get used to the debt changing hands and may not question the validity. By all means, question it.
As soon as you receive the first notice from a collection agency, request debt validation. This will require them to provide proof that 1) the debt exists, 2) that it belongs to you, and 3) they have the right to collect on it. Until they provide such validation, they must cease all collection activity. Pay them nothing until you receive this validation. If they fail to validate, their collection activity must cease entirely and any negative listing they have reported to the credit bureaus must be removed from your credit reports.
How will a charge off affect your credit?
You should expect a charge off to drop your credit scores considerably. Plus, when potential creditors see the charge off on your credit reports, they may decide you are too big of a risk for them to trust you with a loan. This should be of paramount concern if you are in the market for a home or auto loan – now or any time soon – as some lenders may not extend credit to you as long as you have these unpaid balances hanging over your head.
How can you have a charge off removed from your credit reports?
Try to arrange a pay-for-delete. This means that in exchange for you paying the debt, the creditor will remove the charged off status from the account on your credit reports. There is no guarantee that a creditor will agree to this, but you’ll have the best chance if are able to pay the debt in full, and in one payment. That said, you should never agree to pay more than you know you can afford. So before you send a letter requesting a pay-for-delete, make sure you know what your budget will allow.
If the creditor has already sold the debt, all is not lost. You can still try for a pay-for-delete through the new debt collector.
Either way, be sure to get the agreement in writing before you make the payment. (Refer to this sample agreement, which you should send via certified mail with return receipt requested.) Only send your payment in after they have signed and sent the agreement back to you. After they have received and processed the payment, follow up by checking your credit reports to be sure they have held up their end of the deal.
Just keep in mind that charge offs fall of your credit reports after 7 years. If you’re getting close to that point – and you don’t need to apply for credit in the meantime – you can always wait it out. Of course, it’s possible that the statute of limitations in your state is longer than 7 years. In that case, it’s probably a good idea to pay it (if you can) to avoid the possibility of a lawsuit.
Note, you can also discharge charge offs in bankruptcy, but that should only be a last resort.
How can you prevent a charge off?
Pay your bills on time.
As long as you stay current on your payments, your account cannot be charged off. If it’s an installment agreement, this means paying the same amount every month. If it’s a credit card, this means making at least your minimum payment, but it’s always best for your credit (and your bank account) to pay the full balance owed.
That said, circumstances beyond your control may prevent you from making timely payments, like a loss of income or an emergency medical situation. Whatever the reason you are falling behind, contact your creditors about it. Together you can talk about the situation and hopefully work out a doable payment arrangement.
Beyond that, look at your budget. What can you cut from your expenses to help you get back on track?
How do you repair your credit after a charge off?
As much damage as a charge off can do to your credit score, there are plenty of actions you can take bounce back:
1) If the original creditor still owns the debt, contact them directly to try and work out a pay-for-delete. Paying them in exchange for removing the charge off will reverse the damage.
2) If the original creditor has sold the debt to a debt buyer:
- Request debt validation from the new collector. If they don’t validate, the listing must be removed from your credit reports. This won’t remove the original creditor’s charge off status from your credit reports, but it will at least minimize the number of listings related to this one account.
- Look for reasons you may be able to dispute the debt, an invaluable part of the credit repair process. Inaccuracies could include the name of the original creditor, balance owed, date of first delinquency, or date of last activity. So check your records carefully. If you see a discrepancy, submit a credit dispute to the credit bureaus and/or the debt collector, including supporting documentation.
- If the debt is verified and accurate, try for a pay-for-delete. If you can get the debt collector to agree to this, they remove the charge off from your credit reports.
- Look for other inaccuracies on your credit reports that may need disputing. Though they are separate from the charge off in question, getting other errors cleaned up will help improve your credit overall.
3) Build positive credit:
- Pay all your bills on time, every time
- Don’t use more than 30 percent of revolving credit
- Pay off your credit card balances every month
- If you don’t have a credit card — and your credit is too bad to qualify for one — consider applying for a secured credit card
- Pay attention to your credit mix
- Keep new applications for credit to a minimum
If you can get the charge off removed from your credit reports, great. But at the very least, building positive credit will help minimize the impact of a charge off, or any other type of negative listing. It may not be by much, and it may not be evident right away, but over time it will make a big difference.