If you’ve racked up several missed payments and are watching your credit card debt increase rapidly, you have more to worry about than your rising balance.
Your creditor may have the loan charged off as bad debt.
According to the Federal Reserve of St. Louis, this happens to about 2.25% of credit card debts in the U.S.
But what does that mean? Let’s take a look.
Table of Contents
Key points
- A charge off means your creditor has given up on getting repaid
- It doesn’t mean that you no longer owe the debt
- It will hurt your credit score substantially
- An account won’t be charged off unless it’s three to six months past due
- There is no way to remove a legitimate charge off from your credit report without making at least a partial payment
- The best way to deal with a charge off is to do whatever it takes to prevent them in the first place
What is a charge off, and why is it on your credit report?
If you don’t make the minimum payments on your account for several months, your creditor will often write your debt off as “bad debt.” This means the creditor or lender has essentially given up hope that you’ll repay the money you owe and considers your loan uncollectible.. The creditor will close your account.
Many types of debt can be charged off. These include:
- Personal loans
- Credit cards
- Student loans
- Revolving lines of credit
- Any other unsecured debt you’ve failed to repay
What is a profit and loss write-off?
If you see this term on your credit report, what it really means is that your creditor has written off your debt after deciding that it isn’t worth collecting. This means that it has been charged off as bad debt.
You’ll have some warnings before the account is charged off
You should have some warning before a charge off appears on your credit report. You’ll likely get multiple past-due notices and phone calls reminding you to pay.
When a creditor charges off your debt, they will notify the three major credit reporting agencies (Experian, Equifax and TransUnion). The creditor may also sell the debt to a debt collection agency, to a debt buyer or may try to collect through its own in-house collections department. This means you’ll likely receive annoying and potentially aggressive calls from debt collectors.
Pro tip: A charge off is one of the worst financial black marks that can appear on your credit report. It will significantly hurt your credit score and even though the debt has been written off by the creditor, you legally still owe the money.
You aren’t safe if you make a payment but it’s less than the monthly minimum. The account can still be charged off. To avoid this, you must make a lump-sum payment to keep your account current.
When does a charge off happen?
The standard time for an account to be charged off is between 120 to 180 days, so three to six months.
Charge offs aren’t immediate. If you miss a payment or two you don’t have to worry about it — yet. First your creditors will send payment reminders and letters reminding you that your bill is past-due. After that, they begin the collections process.
Pro tip: If you’re behind on your payments and are worried about an account being charged off, contact your creditor and ask about hardship programs. Be honest about your financial situation and tell them that bankruptcy may be your only option. If you file for bankruptcy, the creditor will walk away with nothing, so many are willing to work with you to prevent this.
Charged off doesn’t mean your debt is paid off
Don’t think you no longer owe the debt just because it’s been marked as charged off. This does not mean the debt has been forgiven. It simply means the creditor believes you won’t fulfill your obligation to repay the money.
Unless you reach a settlement or file for bankruptcy, you remain responsible for repaying the debt until the statute of limitations on debt in your state is reached.
Charged-off accounts will hurt your credit score
Charged-off accounts affect your credit score because they mean you’ve established a pattern of missed payments.
Payment history makes up 35% of your FICO score.
According to FICO, which has established one of the two major credit-scoring models, one late payment will cause your credit score to fall. Missing payments by 90 days or more could cause your score to fall by more than 100 points, depending on your current credit score. If you already have bad credit your score will fall less because you’re already starting from a lower point.
When the charge off is reported to the credit bureaus, you’ll not only have the missed payments and collection accounts dinging your score. Now you’ll also have the charge off on your credit report.
This will knock your credit score down even further.
Why care? The lower your credit score falls, the more you’ll pay for insurance, housing deposits and utility deposits. Plus you’ll pay higher interest rates on loans, and a lower score will put you at risk for denials for credit card accounts, new loans or any other new credit accounts.
How long does charged-off debt stay on your credit report?
Charged-off debts will remain on your credit report for seven years. That starts on the date of your first missed payments. The date will not restart if a debt is sold to a collection agency.
Pro tip: Paying the debt will not remove it from your credit report. However, the account’s status will be changed to note that the account has been paid or settled. Even though this stays on your credit report, it shows anyone viewing your credit report that you’ve made an effort to fulfill your obligation to repay the debt.
It will fall off your credit report at the end of seven years. You should not need to take any additional steps to remove it unless it fails to disappear.
What to do if you have a charge off
Sometimes it’s possible to have an old debt that you no longer remember. Federal law requires that creditors and debt collectors verify any unpaid debt in writing. This is known as a debt validation letter and must be sent within five days of your initial contact. If you don’t automatically ask for one, even if you know the debt is legitimately yours.
The letter should include:
- How much you owe
- Your original creditor
- Instructions on how to contest the debt
- Once you get a debt validation letter, ask yourself:
- Is the debt actually yours?
- Have you repaid the debt?
- Is the debt past its statute of limitations?
Pro tip: If you have an account that’s already been charged off by a creditor, focus on keeping your other payments up to date before worrying about the charged off debt. The damage to your credit score has already been done, and at that point your priority should be to prevent additional debts from being charged off. Preventing more charge offs will be better for your credit score than removing an already-established one.
READ MORE: Debt validation letters
Should you pay a debt that’s been charged off
To be honest, it depends. If the debt is legitimately yours, It’s probably worth contacting your creditor to make a settlement offer, unless your debt is close to your state’s statute of limitations. However, the most important thing at this point is to keep your other accounts current. If that means leaving the charge off unpaid, that will be your best move.
Pro tip: Make sure you check your state’s statutes of limitation. You do not want to risk resetting the clock on a debt that’s close to expiration just because a debt collector is pressuring you.
Once a debt is charged off, the notation remains on your credit report whether or not you repay the debt.
If you pay it, the notation will be changed to “paid charge off.” This is not likely to improve your credit score, though it may look better to lenders, potential employers or landlords who review your credit reports.
Disputing a charge off
It’s possible that the charge off isn’t legitimate, and is instead a mistake or a clerical error. In this instance, you can dispute the item on your credit report and ask the creditor to validate the debt.
You can do this by writing a simple dispute letter. There is no need to work with an expensive credit repair company. Use a template, write the letter and send it by certified mail to your creditor or credit card company. Make sure to include delivery confirmation. You should be able to do all of this for less than $10. If you don’t have access to a printer, your local library will generally have printing services for a small fee.
READ MORE: How to prove a debt is not yours
According to the Consumer Financial Protection Bureau:
You have the legal right to dispute inaccurate information directly with both the credit reporting companies and the companies that furnish your information to the credit reporting companies. To fully protect your rights, you should always dispute credit report inaccuracies with them both. They must conduct a reasonable investigation, and fix mistakes as needed, usually within 30 days, at no cost to you. There is no reason to pay someone else to dispute inaccuracies on your credit report for you as it is already a legal right available to you for free.
READ MORE: How to remove a charge off from your credit report
If the charge off is legitimate
There is no way for you to remove a legitimate charge off from your credit report.
The only steps you can take are to pay it, settle it or convince your lender to remove it or change the charge-off status.
Occasionally the creditor will agree to remove it if you call them and ask, but they will likely expect you to pay at least a portion of the debt in exchange for the removal. This is sometimes called pay-for-delete because you pay the creditor in exchange for removing the charge off.
Pro tip: “Pay for delete” refers to when debt collectors offer to remove the collections account from your credit report. In exchange, you must pay off at least a portion of the debt.
This is a legal gray area. Debt collectors are required by law to report accurate and complete information to the credit bureaus.
Also, it may not be worth it. Under current credit scoring models, a “settled” notation on your credit report won’t hurt your credit score. It’s the process that got you to that point (the missed payments and charge off itself) that do the actual damage.
DIY settlement
It’s possible to try to negotiate your own settlement with the creditor in order to get the charge off removed. However, you’ll need to be disciplined enough to build some savings and a reasonably good negotiator for this to work. Otherwise, you’ll probably be better off working with a professional debt settlement company.
Before you try to negotiate with any creditor, you must:
- Build some savings
- Determine how much money you can realistically pay
- Figure out how soon you can pay it
If you can’t offer a lump sum, try to negotiate a payment plan with removal when the payments have been completed.
If you can pay a lump sum, you’ll have more negotiating power to get the charge off removed from your credit report.
Once you’ve determined how much you can afford to pay
- Contact your creditor: Ensure you’re speaking to someone with the power to negotiate.
- Tell your creditor how much you can afford to pay and that you can make the payment immediately, but in exchange, you’d like the debt to be considered paid and the charge-off removed from your credit report.
- Get any agreement in writing.
- Send payment once you have the written agreement.
- Make sure that you get written confirmation of the paid charge off.
Pro tip: If the creditor will not agree to remove the charge off but offers a settlement and you can afford to pay the total requested, you should still seriously consider the offer. Having the charge off noted as paid or settled may help you increase your credit score.
READ MORE: DIY debt settlement
How to avoid charge offs
The best way to protect your credit score is to avoid the charge off in the first place.
Act as soon as you’re having problems making payments, particularly if your credit score is still good:
- Contact your original creditor or credit card issuer before the debt is sold to a third-party collector or charged off. Ask if they offer any hardship programs. They may be willing to work with you if you’re experiencing short-term financial hardship, particularly if you can offer documentation of the hardship.
- Apply for a debt consolidation loan and use the loan proceeds to pay your original lender.
- Apply for a balance transfer credit card: These cards with an introductory 0% APR allow you to transfer your existing debts onto the new card. In exchange, you pay a balance transfer fee ranging from 3% to 5%. However, you’ll need to have a good credit score to qualify.
- Talk to a debt settlement company: A professional can help you negotiate a settlement agreement and will make sure the payment obligations are met. Because creditors work with them on a regular basis, it may be easier for them to negotiate a settlement on your behalf.
- Debt Management Plan: A credit counselor will contact your creditors and set up a repayment plan for your unpaid debts. It will cost less in fees than debt settlement, but you’ll have to repay the full amount of your debt.
READ MORE: How does debt settlement work?
Don’t ignore it
Whichever option you choose, it’s important to take action quickly. Once the debt is charged off, it will significantly hurt your credit score, and removing the charge is complicated.
The bottom line
The worst thing you can do is ignore an unpaid debt. It won’t go away, and it will make it harder to get credit cards, car loans or even buy a house.
If you’re behind on your payments, contact your creditor as soon as possible. They may be willing to work with you.
If you’re confused about what’s happening or need some advice, DebtHammer can help. Schedule a free consultation now.
FAQs
This means that your lender no longer considers your debt as an asset because it is unlikely to be collected. Confusion arises from borrowers when they see the notice that their debt has been canceled. Cancellation means a debtor is no longer obligated to repay the debt. However, that will have negative consequences for their credit history and score.
This notation doesn’t mean that the debtor is entirely free from its impact. The canceled debt will still be reported to credit bureaus, which will have negative impact on credit history and scores. In addition, the canceled debt may have tax implications, as the forgiven amount could be considered taxable income. It’s advisable to consult with a financial professional or credit counselor to understand the specific implications in your situation.
When an installment loan is charged off as bad debt, several things will happen. These include:
Collection efforts
Reporting to credit bureaus
Potential legal action
Tax implications
Impact on future credit access
While taking action before the loan is charged off is better, it is crucial to take action once you get a notification that your loan has been charged off.
When a car loan is charged off as bad debt and purchased by another lender, the original lender has decided to sell the debt to another financial institution after determining that the debt is unlikely to be repaid.
Instead of continuing to pursue collection efforts, the original lender sells the charged-off debt to another financial institution. This is a common practice in the lending industry.
The ownership of the debt shifts from the original lender to the new lender who purchased it. The new lender now has the right to collect the outstanding balance from the debtor, and the new lender will likely make efforts to collect the debt from the debtor. They may employ their own collection department or outsource the collection to a third-party agency.
It’s important to note that even with the debt being purchased by another lender, you must repay the outstanding balance. Be sure to contact the new lender and discuss repayment terms. Because car loans are secured by your vehicle, you don’t want to deal with the possibility of the new lender attempting to repossess the vehicle.
