What Is a Charge-Off? (4 Things to Know)

What Is a Charge-Off? (4 Things to Know)
Eric Bank
By: Eric Bank
Posted: March 7, 2016
Experts share their tips and advice daily on BadCredit.org, helping subprime consumers navigate the world of personal finance.

Your credit card company or other creditor may charge-off your debt if you are seriously behind on your payments. A charge-off means that the creditor no longer expects to receive repayment and classifies the amount as a loss.

According to the IRS, credit cards may charge-off an account that has gone 180 days without a minimum payment. Just because the creditor declares your debt uncollectable doesn’t remove your responsibility to pay.

1. You’re Still Expected to Pay What You Owe

Even though accountants use the term “uncollectable” for charged-off accounts doesn’t mean you no longer owe the money — the creditor is still due the full account balance. States do have various statutes of limitations that limit how long a creditor can collect a debt, but until that time, your creditor can legally go after you for the full amount you owe.

2. The Debt Might Change Hands

The creditor may not want to get its hands dirty trying to collect a charge-off. Instead, it might sell the debt to a collection agency for a few cents on the dollar. When that occurs, you owe the money to the debt collector, not the creditor. But be on the lookout, because there are numerous fraudulent debt collection schemes out there, so you need to verify you are dealing with a legitimate company.

3. Your Credit Score Will Take a Hit

The next seven years after a charge-off will be unforgettable, because that’s how long you must carry around a black mark on your credit history. Of course, you’ll also be dinged for all the pre-charge-off missed payments. All told, your credit score will tank and you’ll find it hard to access credit, qualify for mortgages and car loans, or pay a low interest rate.

You can start the repair process by paying back your debt in full, even after it’s charged-off. Your credit history will be updated to read that your charged-off account was paid in full instead of indicating that the debt was settled for less than the full amount due, or that you haven’t made any payment at all (which really hurts your score). Creditors would rather see you pay off late than not pay off at all.

4. A Debt Service or Pay-for-Delete Letter May Help

There are credit counseling and debt management programs out that can help you when you’re having trouble keeping up with your payments. Look for a well-respected non-profit agency that can help you work out a sensible repayment plan with your creditors, providing a pathway toward debt reduction and elimination.

One nice thing is that enrolling in one of these programs won’t restart your 7-year black-mark period (unless you roll your debt into a new account).

Lastly, you might be able to recover if the charge-off was the result of a temporary crisis in your life, such as a medical emergency or layoff. What you do in this case is to send a “goodwill letter” to your creditor requesting it remove the negative information from your credit history and promising to pay back the full amount in the near future.

It can help if you have an otherwise sterling credit history of making your payments on time after the charge-off and you can describe in great detail what forced you to fall behind on your payments.

Final Thoughts

An uncollectable account that has been charged off as bad debt will haunt your credit history for a long time, so it’s best to pay off your balance even after it’s charged off. Paying off your balance will keep the debt collectors away and help repair your credit score.