If you stop making payments on one of your debts altogether, what happens? In the beginning, the consequences are typically in the form of stern letters and late fees. However, when you fall severely behind, your creditors may eventually stop trying to collect and charge off your debt instead.
What do charged-off debts mean for you and your creditors? Is the debt gone, or are you still on the hook? In this blog, we’ll explain what happens when debt is charged-off and what to do if you have a charge-off in your credit history.
What Exactly Is a Charge-Off?
A charge-off is a negative entry on your credit report showing that a creditor closed an account and gave up on trying to collect payments. When this happens, your creditors will report the charge-off to credit bureaus. They may also pass your debt off to a collection agency or a debt buyer.
When Can a Charge-Off Occur?
If you’re late for the very first time on a payment, don’t panic! Creditors only resort to charging off debts when they become severely delinquent.
When you initially fall behind on payments, your creditor will first try to contact you and remind you that you’re past due. However, if you haven’t paid for 90 to 180 days, they can change tactics and charge off your account.
What Do Charge-Offs Mean for Creditors?
When a creditor charges off a particular debt, they take it off of their balance sheets and write the account off as a loss. This allows them to list the debt as a “bad debt” and an expense in their profit-and-loss statement.
Companies still have the right to pursue collection even after they’ve charged off a debt. They may choose to sell or transfer charged-off debts to a collection agency or a debt buyer, allowing them to recoup a fraction of their loss.
What Do Charge-Offs Mean for Borrowers?
If your creditor charges off one of your debts, does that mean you’re in the clear? Unfortunately, no — you are still responsible for paying back the money you owe until the statute of limitations has been reached. Your creditor could also sue you in an attempt to collect the money.
Additionally, charge-offs are listed as derogatory marks on credit reports, meaning they can negatively impact your credit score. Similar to bankruptcy, a charge-off and the balance you owe can remain on your credit report for seven years, making it difficult to apply for new lines of credit.
Another important thing to remember is that charge-offs don’t stand alone — multiple months of nonpayment can hurt your payment history, which accounts for more than a third of your credit score. That, in addition to the ding of a derogatory mark, can mean serious trouble for your creditworthiness.
Charge-Off vs. Collections
When a debt is only charged off, your original creditor is still entitled to what you owe, and a derogatory mark is listed on your credit report.
However, if your creditor chooses to send your debt to collections, you’ll need to work with a collection agency or debt buyer to pay off your debt rather than the original creditor. A new derogatory mark — “collections” — will appear on your credit report. The charge-off balance gets changed to zero, and the amount you owe gets listed under the collections mark.
What Should I Do If I Have A Charged Off Account?
If you receive a charge-off – consider the following options to address it:
- Dispute Errors
- Pay the Balance
- Ask Your Credit for a Payment Plan
- Focus on Improving Your Credit Score
Dispute Any Errors
Gather your credit reports from TransUnion, Experian, and Equifax, and request the account’s payment history from your lender. Review each document closely and highlight any possible errors — these include incorrect dates, wrong account numbers and borrower names, and balance and payment discrepancies.
If you see any mistakes, gather your evidence and file disputes. If your disputes are found to be valid, the credit reporting agencies and your creditors will update their reports — hopefully, the corrections leave your finances in a better state! However, if the furnishers determine that your claims are incorrect, be sure to request statements that explain the dispute in more detail for your records.
Pay the Balance
If the information on your credit reports and payment histories is correct, the best way to deal with a charge-off is to pay the debt in full. Once paid off, the charge-off mark on your credit history will be relabeled as “charge-off paid,” showing that you resolved the negative account. While future lenders would prefer to see no derogatory marks on your credit report, paid charge-offs are typically considered to be more favorable than unpaid accounts.
Negotiate a New Payment Plan
Many creditors would rather receive some payment than no payment at all. If you’re unable to pay what you owe in full, contact your creditors to see if you can agree on a payment plan.
Focus On Improving Your Credit Score
It may take a few years for your credit score to recover after receiving a charge-off. Fortunately, you don’t have to sit back and wait to make other improvements. Work on building new habits to repair your credit score.
More on Credit Scores and Repair
With quick action, patience, and smart financial moves, you can help your credit score bounce back. Read more from Top Dollar: