What Is a Charge-Off and What Should You Do About One?

Nov 30, 2018

Charge offs

If you’ve ever been in a situation in which you or someone you know has gotten seriously behind on payments to a credit card account, or have stopped making payments entirely, you may recall that the creditor may have declared the account a charge-off. Upon learning this, it’s not unusual for the person with the delinquent account to assume that this means they’re off hook for the debt. However, this would be a costly mistake with a number of potential consequences. Here’s what to know, and how to handle a charge-off, if you or someone you care about is in this situation: 

What it means: When a credit card company declares an account charged off, the account has become so delinquent that it is considered to be a loss, and it is written off the creditor's books for the purpose of their taxes. This generally occurs after six months of consecutive missed payments. At the same time, the account holder is still responsible for the balance, and the creditor can still make an effort to collect what is owed. An exception to this would occur if the individual is relieved from the obligation to pay under a bankruptcy discharge.

What happens once an account is charged-off? At this point, the creditor cancels the account and requires payment in full. Although delinquency on the account has most likely already been reported to the credit bureaus, the creditor will generally include the charge-off as an additional entry.

After a charge-off occurs, the person with the unpaid debt may notice that collection phone calls stop for a time, which is one reason that it may seem as though they are in the clear. In fact, it’s much more likely that the debt is in the process of being sold to a debt collector or entrusted to a third party that will resume collection activities.

Not only can the creditor or debt collector continue to contact you for payment, they can actually sue you for the debt if it’s within your state’s statute of limitations (4 years in California for unsecured debt such as credit cards). And as The Nest cautions, creditors usually succeed in obtaining a judgement against you if you don’t pay over a certain period of time.

Just how much will a charge-off impact your credit? Because it represents account delinquency to the fullest extent, a charge-off is one of the most damaging entries to have on a credit report. In general, it will stay on the credit report for seven years from the time it was charged off. If it remains unpaid, the charge-off can make it difficult for the individual to obtain another credit card or loan, or even have an application approved for something that requires a credit check, such as an apartment rental.

So what’s the best course of action if you’re received a charge-off? As WalletHub tells it, the  account delinquency can do no further damage to your credit after a charge-off— there is only room for improvement at this point. But how to best handle a charge-off depends somewhat on the individual’s situation. After all, taking no action could result in court action depending on whether the account is still within the statute of limitations. Furthermore, you’re more likely to get future applications approved if you take care of a past due account that is currently impacting your credit standing. However, it’s important to first ensure that the debt is actually yours and that you haven’t already paid it, it’s still legally collectible, and that any collection agency that is attempting to obtain payment has the authority to do so. If there are any doubts on your end, insist that the creditor or collection agency send you documentation.  For answers to common questions on this topic, visit The Balance at “Debt Validation Requirements for Collectors.”

Can you get a charge-off removed? It may be possible to negotiate a removal of a charge-off with the creditor using a strategy referred to as “pay for delete.” However, creditors don’t have to work with you on this, and the process is not as simple as getting a verbal agreement from the debt collector. As The Balance asserts, it’s important to get all agreements in writing before making any payments, and best to negotiate with the original creditor. For guidance in this process, check out “How to Remove a Charge-Off From Your Credit Report.”

If you can’t get a charge-off removed, will it still help your credit to pay it? Although paying the balance on an account that has been charged off will not result in an immediate boost to a credit score, it will help to improve it over time. In addition, creditors and lenders view charge-offs that have been “Paid in full” more favorably than those that remain unpaid. However, it’s important to monitor all three credit bureaus to ensure that the account is properly updated, and to keep proof of your payment in case it’s needed for any potential disputes.

Looking for more help in tackling your credit card debt? Keep in mind that as an SFPCU member, you have access to free financial services and guidance through our partnership with the experts at BALANCE Financial Fitness Program. This includes no-cost advice in managing debt, as well as other critical areas affecting your financial life. Learn more at https://www.balancepro.org/