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

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Updated April 02, 2024

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Definition

You've fallen behind on a loan payment—far behind. After a certain period of non-repayment, your debt is considered a charge-off, or a debt that your creditor assumes you won't pay. Although you're still legally liable for this debt, your original creditor may turn it over to a collection agency to recover it.

What Is a Charge-Off?

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. A delinquent borrower is 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 澳洲幸运5官方开奖结果体彩网:delinquent after a period of time. Having a charge-off can mean serious repercussions on your 澳洲幸运5官方开奖结果体彩网:credit history and future borrowing ability.

Key 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.
A delinquent borrower are still legally responsible for paying their debt.
Charge-offs may be sold to a 澳洲幸运5官方开奖结果体彩网:collections company or a 澳洲幸运5官方开奖结果体彩网:debt buyer.
You will owe a debt until it is paid off, settled, or discharged in a 澳洲幸运5官方开奖结果体彩网:bankruptcy proceeding.

Charge-Off: A company writing off debt because it doesn't believe it will receive the money itâs owed. — Investopedia / Mira Norian

How a Charge-Off Works

A charge-off usually occurs when the creditor deems an outstanding debt uncollectible; this typically follows 180 days or six months of nonpayment. However, the borrower is still legally responsible for paying a debt marked as a charge-off.

In addition, debt payments that fall below the required minimum payment for the period will also be charged off if the debtor doesn't make up for the shortfall. The creditor crosses off the consumer’s debt as uncollectible and marks it on the consumer’s 澳洲幸运5官方开奖结果体彩网:credit report as a charge-off.

The fallout for having a charge-off on your credit report includes a fall in 澳洲幸运5官方开奖结果体彩网:credit score and difficulty in getting approved for credit or obtaining credit at a lower 澳洲幸运5官方开奖结果体彩网:interest rate in the future.

Paying off or settling the overdue debt doesn't mean the charge-off status will be removed 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 explaining the issue, iജncluding proof of a good payment history up until the 🃏time of the setback.

What Happens With Charged-Off Debt?

The 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:Fair Debt Collectio﷽n Practices Act (FDCPওA).

On the other hand, the removal of a charge-off status from a consumer’s credit report doesn't 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.

Note that just because a debt has passed the statute of limitations on its payment doesn't mean that the consumer no longer owes. It just means that the creditor or 澳洲幸运5官方开奖结果体彩网:debt collector will not be able to get a judgment in cꦍourt for the payment of the old debt.

Creditors refer to uncollectible debt as bad debt. When a firm incurs a bad debt, it 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:credit card debts or 澳洲幸运5官方开奖结果体彩网:signature loans.

Should I Pay Off Charged-Off Accounts?

You should pay off charged-off accounts because you are still legally responsib💦le ﷽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 Report?

You can try to 澳洲幸运5官方开奖结果体彩网:remove a charg🌌e-off from your credit report by paying off the debt, negotiating a 澳洲幸运5官方开奖结果体彩网:pay-for-delete agreement with the lender, or hiring a 澳洲幸运5官方开奖结果体彩网:credit repair company. However, in most cases when you pay off a charge-off debt, the status of the debt will be changed to “charge-off paid.” A charge-off on your credit report can be a negative sign to other lenders, which can hinder your ability to get future loans.

Is a Charge-Off Worse Than a Collection?

A charge-of🌊f 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're 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.

Article Sources

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