What Does it Mean When Your Account is Charged Off?

What Does it Mean When Your Account is Charged Off?
Mike Randall
By: Mike Randall
Posted: November 8, 2013
Experts share their tips and advice daily on BadCredit.org, helping subprime consumers navigate the world of personal finance.

If you are in financial trouble and have not been making the payments due on your credit card or loan, you may be in a bad situation.

That’s why when a notice shows up saying your account has been “charged off,” you may actually feel a bit relieved.

A charge off sounds like the bank just said, “We guess they are not going to pay, so we should just forget about it.”

That way of thinking is completely wrong.

When an account is charged off, it does not mean the loan has been cancelled by the creditor.

What this financial term actually means is the loan has been marked on the bank’s books as noncollectable and has been recorded as a loss. However, it still exists and has value to the creditor.

They may make further attempts to collect, depending on the size of the loan and what assets you have. They might also seek a financial judgment against you in court. If you’re worried about charge-offs, contact a debt relief service to start getting your finances under control.

A loan that has been charged off sticks around for a pretty long time. It can last up to seven years in most cases. Your credit report will now reflect a charge off for that full seven years.

You may see a R9 code, indicating a revolving credit charge off, or an I9 code, meaning an installment credit charge off.

Account charged off flow chart

In either case, your credit will be negatively affected.

The most likely course of action when an account has been charged off is the creditor is now able to sell your delinquent loan to a third-party debt collector. For this reason, you may not hear from your creditor once they have declared your loan uncollectable and they have taken it off their books.

Debt collectors purchase uncollectable debts from banks and lending institutions for pennies on the dollar. They work on the hope that at least some of the debts they buy will be repaid, at least partially.

Because an individual’s debt remains active for seven years, you can expect to have attempts made to collect on it in the future. Sometimes a debt collector will resort to intimidation, threats or harassment, but these tactics are against the law. It is important to know your rights.

They may also try to get you to pay a small amount as a “good faith effort” in beginning to pay back the debt. Be careful about doing this because it may in fact start the clock over again on your seven-year obligation.

The bottom line is once you have had an account charged off, there is very little you can do to correct it, aside from repaying the debt. If you find you are able to pay back your debt at some point, make sure the creditor you are paying back will agree to remove the charge off from your credit report. This is the only way to get your credit back on track and start rebuilding your good score.

Photo source: cheomoms.com