Understanding Charge-Offs: An In-Depth Guide
7 MIN READ
Published August 29, 2023 | Updated September 07, 2023
A charge-off is when a lender writes off a debt as a loss. If you’ve become delinquent on payments on an account and the lender doesn’t believe they can recover it anymore, they mark it as charge off. The original creditor can then sell your account to a debt collection agency. It’s important to remember that you’re still required to pay off the debt, settle your account, or get it discharged through bankruptcy.
What is a Charge-Off
If you notice the term “charged off” on your credit report, it’s important to understand what it means and what action you should take. So, what is a charge-off? A charge-off simply means that the lender has written off your debt because they don’t believe they’ll recover what you owe.
Even after a charge-off, you’re still responsible for paying it off. A write-off and charge-off mean the same thing. For an account to be in this status, you’ll have to be significantly delinquent on your account. This can have a serious negative impact on your credit score and can make it difficult for you to borrow in the future.
Types of Debt That Can Result in Charge-Offs
Any uncollectible debt is known as bad debt. Charge-offs are more likely with unsecured debts, where there is no collateral attached to the account. Some common forms of debt that can result in a charge-off include:
- Personal loans
- Credit card debts
- Student loan debt
- Medical debt
How a Charge Off Can Affect Your Credit Score
Missed payments and late payments can hurt your credit scores, and the impact is even worse when you do not pay your bills each month. For example, if you’re 30 days late on a payment, your credit score may drop as much as 100 points. But, if you fail to make that payment even after 90 days or 180 days, the damage gets worse.
If you fail to make payments for six months, the lender will mark your account as charged off. By then, your credit score is likely to be in bad shape. With a charge-off entry, your credit score will go lower. The impact of this negative entry will lessen over time, and your credit score may recover if you pay your bills on time.
What are the Legal Implications
A charge-off can remain on your credit report for seven years. During this time, you can either pay off the entire balance or settle your credit card debt. Another option is to send your lender a pay-for-delete letter and negotiate to get it removed once you pay off the debt.
Even after the account becomes a charge-off, the lender can still sue you in court to collect the debt if the statute of limitations has not passed. This can result in wage garnishment and court-ordered payments. Once the statute of limitations has passed, you cannot be sued for unpaid debt.
A collection agency or a lender cannot try to collect an old debt after the statute of limitations has passed. If they try to collect or contact you even after you’ve asked them not to contact you, their actions are against the Fair Debt Collection Practices Act (FDCPA).
How to Deal with a Charge-Off
Whether you’ve failed to make payments on your credit card, personal loan, or any other type of debt, if you notice a charge-off on your credit report, it’s important to act immediately so the situation doesn’t get any worse. The first thing you should do is to ensure that the information is accurate. Verify the information to ensure that you owe the debt. The collection agency may not always have accurate information.
Understanding the Charge-Off Date
While verifying your information, it’s important to check not only the accuracy of your outstanding balance but also the charge-off date. The date for the charge-off should be the date you first failed to make the payment on your original account. This is important because a charge-off stays on your credit report for seven years.
If there’s an erroneous charge-off, or if you still see it on your credit report even after seven years, you can dispute it. Credit bureaus are usually required to investigate and review disputes within 30 days.
How to Remove a Charge-Off from Your Credit Report
Now that you have a better understanding of what a charge-off is, let's talk about whether it’s possible to remove them from your credit report. Charge-offs will drop off your credit report automatically after seven years.
You can also try other methods to remove it earlier, such as by disputing an erroneous charge-off or by negotiating a pay-for-delete agreement. This means you can send a pay-for-delete letter to your lender, asking them to remove the charge off once you clear your debt. Your lenders are not legally required to accept the agreement, and in most cases, your account will be marked as “paid charge off” once you pay off the debt.
Examples of Charge-Off Recovery
While a charge-off can have major negative consequences for your credit, it’s possible to recover and rebuild your credit with good credit habits. It’s also important to learn how to avoid charge-offs in the future.
Rebuilding Credit After a Charge-Off
Once you’ve taken steps to address the charge off, it’s time to rebuild your credit through healthy credit steps. Here are a few things you can do:
- Consider credit counseling or working with a personal finance expert to make a budget and learn how to avoid overspending.
- Set up autopay so you do not miss any payments. A good payment history will help you rebuild credit.
- Sign up for a secured credit card to rebuild your credit. You’ll need to offer a deposit to the credit card issuer to get the card, but it can be an effective way to start building your credit.
- Do not use more than 30% of your credit limit.
- If you have any other debts, consider debt management or debt consolidation to pay them off at the earliest.
Avoiding Future Charge-Offs
The most effective way to avoid charge-offs in the future is to pay your debts in a timely manner. Make a budget so you have a better idea about your income and expenses. Set up autopay on your bills and debts to ensure they never get past due.
If you can’t pay your debts, contact your creditor at the earliest to work out a payment plan. If you are facing financial hardship and are acting in good faith, your lender may be willing to work with you. The idea is to take action before your account becomes delinquent.
Finally, check your credit report from all three major credit bureaus, Equifax, Experian, and TransUnion, regularly to keep an eye on any new changes or activities. All of these tips will make it easier for you to avoid charge-offs.
The Bottom Line on Charge-Offs
A charge-off is when a lender writes off a collection account as a loss. Even if you have a charged-off debt, you’re still obligated to pay it. A charge-off can impact your ability to borrow in the future, so it’s important to deal with it at the earliest.
Consider paying off your debt, negotiating a debt settlement, or trying a pay-for-delete arrangement to get the negative items removed from your credit report. If you’re planning to go the debt settlement route, TurboDebt can help. Get in touch with us at the earliest for a free consultation.