What Does a Charge-Off Mean? Effect on Credit Score and How to Remove

What Does a Charge-Off Mean?

A charge-off means a company has written off a debt because it does not believe it will receive the money that it’s owed. You are still responsible for paying debt that is a charge-off.

A creditor or lender may use a charge-off when the borrower has become substantially delinquent after a period of time. Having a charge-off can mean serious repercussions on your credit history and future borrowing ability.

Late Payments Shutterstock_1509506798KEY TAKEAWAYS

  • A charge-off is when a company writes off debt as a loss.
  • When a company uses a charge-off, it believes it can no longer collect, as the borrower has become delinquent on payments.
  • You are still legally responsible for paying the debt.
  • Charge-offs may be sold to a collections company or a debt buyer.
  • You will owe a debt until it is paid off, settled, or discharged in a bankruptcy proceeding.

How a Charge-Off Works

A charge-off usually occurs when the creditor has deemed that an outstanding debt is uncollectible; this typically follows 180 days or six months of nonpayment. You are still legally responsible for paying a debt marked as a charge-off.1

In addition, debt payments that fall below the required minimum payment for the period will also be charged off if the debtor does not make up for the shortfall. The creditor crosses off the consumer’s debt as uncollectible and marks it on the consumer’s credit report as a charge-off.

The fallout for having a charge-off on your credit report includes a fall in credit score and difficulty in getting approved for credit or obtaining credit at a lower interest rate in the future.2

Paying off or settling the overdue debt does not mean it will be removed from the charge-off status from the consumer’s credit report. Instead, the status will likely be changed to “charge-off paid” or “charge-off settled.”

Either way, charge-offs remain on the credit report for seven years, and the affected party will either have to wait out the seven years or negotiate with the creditor to have it removed after paying off all the debt. In the latter case, if the inability to repay the debt on time was due to a temporary setback like job loss, the debtor could write to the lender detailing the issue with proof of a good payment history up to the time of the job loss.

What Happens with Charged-Off Debt?

The statute of limitations is the amount of time that a debt can be collected through the legal court system. Once the statute of limitations has passed, the debt is deemed too old to be collected. In this case, the borrower cannot be brought to court for the unpaid debt.

In fact, the debtor can countersue the collections agency that took them to court over a time-barred debt. A debtor can also sue if an agency attempting to collect on an old debt is asked not to contact the consumer again and does so anyway. Such actions are in violation of the Fair Debt Collection Practices Act (FDCPA).3

On the other hand, the removal of a charge-off status from a consumer’s credit report does not mean the statute of limitations has passed. If, after seven years, the charge-off is deleted from the report, the statute of limitations may still be in effect. In this case, the consumer can still be taken to court for a judgment on their unpaid debt. Each state has its own statute of limitations on debt, which, depending on the type of debt, could be as low as three years or as high as 15 years.4

Note that just because a debt has passed the statute of limitations on its payment does not mean that the consumer no longer owes. It just means that the creditor or debt collector will not be able to get a judgment in court for the payment of the old debt.

Creditors refer to uncollectible debt as bad debt. When a firm incurs a bad debt, it writes off the uncollectible amount as an expense on the income statement. For a debt to qualify as a business bad debt, it must be incurred as part of normal business operations. The debt can be associated with another business or an individual. Bad debt charge-offs are more likely to occur when associated with unsecured forms of credit, such as credit card debts or signature loans.

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You should pay off charged-off accounts because you are still legally responsible for them. You will still be responsible for paying off charged-off accounts until you have paid them, settled them with the lender, or discharged them through bankruptcy.

How do I remove charge-offs from my credit?

You can try to remove a charge-off from your credit by paying off the debt, negotiating a pay-for-delete agreement with the lender, or hiring a credit repair company. However, in most cases when you pay off a charge-off debt, the status of the debt will be changed to “paid charge-off.” A charge-off on your credit report can be a negative sign to other lenders, which can hinder your ability to get future loans.2

Is a charge-off worse than a collection?

A charge-off is generally considered worse than a collection for your credit. With collections, you typically have more negotiating power for getting them removed from your credit report.

The Bottom Line

A charge-off means that a lender has written off a loan as a loss. However, if you have a loan that is a charge-off, you are still obligated to pay it.

Having a charge-off on your credit report can negatively affect your ability to get future loans. So consider either paying down your charge-off loans as soon as possible or negotiating with the lender for a pay-for-delete agreement to remove it from your credit report.

Source: Investopedia