Credit 101: What is a Charge-Off?
Do you have some outstanding debt? You’re not alone – credit card debt climbed by $17 billion in the second quarter of 2021, with the overall number now sitting at $790 billion. But even though debt is not a rare occurrence, it can be a slippery slope that will lead you to charge-off and a poor credit score.
One of the first rules of having healthy credit is making payments on time. If you miss too many debt payments, you may be heading for the dreaded and often misunderstood charge-off. Don’t fool yourself into thinking that charge-off is a solution to unpaid debt – it just means that the creditor marked you as someone improbable to repay a debt.
Here’s more about what charge-off is, when it occurs, and how you can pay it.
Definition of a Charge-Off
A charge-off happens when you don’t pay the full minimum payment on a debt for several months, and as a consequence, your creditor writes it off as bad debt. If you are late on repaying your mortgage, auto loan, or some other kind of debt – you may be heading for charge-off.
Charge-off appears in your credit report and can thus drag your credit score down and make it more challenging to get a favorable interest rate. And that is just one of the consequences of failing to repay debt.
How Do Charge-Offs Work?
Charge-offs are somewhat of a last resort for creditors. Opting for a charge-off means that the company considers your debt a loss on their profit-and-loss statement and thus closes your account.
If your creditor writes off your debt as bad, that means they have deemed it as uncollectible. That typically happens 120 to 180 of your nonpayment. Creditors will first send reminders, but if that fails, they move on to the collections process.
The debt the company writes off doesn’t magically disappear – it is sold or transferred from your now delinquent account to either a collection agency or debt buyer. Such accounts may show up in your credit report as accounts in collections.
Most Common Charge-Off Misconception
Charged off does not mean that the debt is forgiven. Don’t fall into the trap of thinking that you are now free from your debt.
As long as your charge-off stays unpaid, you are obliged by law to pay back the money you owe. The company writes off your debt as a loss for its accounting purposes, but it can still pursue collection and sue you in court and request a garnishment of your wages.
You can be deemed not responsible for paying back the debt if one of these occurs:
● You can settle.
● You can file for certain kinds of bankruptcy.
● Your case reaches the statute of limitations in your state. But note that doesn’t mean that you no longer owe – it just means that the creditor or collector won’t be able to get a judgment in court for the payment of the old debt.
Otherwise, your debt is still your responsibility. To make sure that the information about your charge-off is correct, look out for these things:
● Your account was sold a few times via third-party collection agencies. If it was, see that just the most current collections account is “open.”
● Check the outstanding balance and contact your creditors if there are some extra costs listed.
● Verify the date of the charge-off on the original account and on offspring accounts in collections, too. The charge-off date has to be the same as the date of your first delinquent payment of the original account.
I Paid or Settled My Overdue Debt; What Now?
If you paid or settled the debt, your charge-off will still stay in your credit report. The only thing that will change is its status – it will go to “charge-off settled” or “charge-off paid.” Information on your charge-off will stay on your report for seven years. After that, thanks to the Fair Credit Reporting Act, you have the right to have that information removed. So either you will wait out that period or seek an arrangement with the credit to have them remove the debt information after you pay it off in total.
So, not all is lost. Maybe you were unable to make the debt payment on time due to some temporary turbulent life situation. Perhaps you experienced a death of a loved one or a job loss. You could write in detail to the creditor, providing proof of good payment history up to the moment of the unfortunate life event.
Bear in mind that settling should be the last option on your list. If you choose a company for credit repair, look out for those that readily go for the ‘settle’ option. A professional credit repair company will first look into all the other ways to avoid negative credit report entries.
Get Trustworthy Support
Before you try and tackle charge-off yourself, book a free consultation with an expert analyst. White, Jacobs and Associates has the team and the means to get you to pay the outstanding debt for less than the owed amount.