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- When a creditor charges off a debt, usually 180 days after it’s due, they stop collection attempts.
- Debt charge-offs significantly lower your credit score and stay on your credit report for seven years.
- While your creditor has stopped collection attempts, you’re still legally responsible for the debt.
If you have an outstanding debt that has gone unpaid for months, you may see a debt charge-off on your credit report. A debt charge-off means your creditor has decided to discontinue collection efforts and write your account off as a loss for the company.
While your creditor will no longer attempt to collect on your debt, a charge-off will hurt your credit score significantly and make it challenging to borrow money through a loan or credit card. However, there are ways to mitigate the damage caused to your financial future.
Debt charge-off explained
A debt charge-off occurs when a creditor stops trying to collect an unpaid debt after the borrower has failed to make payments for several months. Although a charge-off means your lender will end attempts to reach you, it won’t legally absolve you from paying your debts.
According to Rod Griffin, senior director of consumer education and advocacy at Experian, credit card companies usually write off your account as a loss and charge off your debt after about 180 days or six months (depending on the creditor and their policy) of your account being delinquent.
When a lender assumes it can no longer recoup the cost of the bad debt, it will write the unpaid debt as a loss for tax purposes. The lender may then sell your debt to a collection agency or a third-party debt buyer at a reduced price. While you no longer owe the original creditor, a different debt collector will approach you to collect your debt.
Does a charged-off account affect your credit score?
All your credit-related activity ends up on your credit reports, which are created by the the credit bureaus — Experian, Equifax, and TransUnion. This includes any charged-off accounts.
The credit scoring algorithms FICO and VantageScore that turn your credit report into credit scores heavily consider payment history in their calculations, 35% and 40%, respectively. Even a 30-day missed payment can cause your credit score to drop, let alone a charged-off deb that has remained unpaid for months.
What to do if you have a debt charge-off on your credit report?
A debt charge-off can be a setback to your financial future. However, you can take several steps to reduce the impact of a charged-off debt.
Pay the debt in full
It may be tempting to forget about your old debt, especially if your creditor isn’t actively trying to collect it. However, you’re legally responsible for paying it back. A debt collector can continue to make phone calls and send letters to ask for your missed payments.
Your creditor may even take you to court as long as they do so within the defined statute of limitations, usually three to ten years, depending on your state and type of debt.
If you don’t have the funds to pay your debt in full, your debt collectors may set you up on a payment plan. While charge-offs can stay on your record for seven years, a paid charge-off appears as a “paid collection” on credit reports. Lenders look upon paid debts more favorably than unpaid charge-offs.
Challenge the validity of the charged off account
If you believe a charged-off debt on your account is incorrect, dispute the derogatory mark immediately. If you submit a dispute within 30 days of a debt collector reaching out, they must provide verification of the debt. Another reason to fight the charge-off is if the statute of limitations on your debt expires. At that point, debt collectors can no longer pursue old debts or sue you for missed payments.
If you see a charged-off account on your credit report and believe it shouldn’t be there, send a debt validation letter to the collection agency to have the debt reversed.
Attempt to settle your debt
If you struggle to pay off your debts, even in monthly installments, you can negotiate with your creditors to settle your debt for a reduced amount. You can also hire a debt settlement company to negotiate with your creditors on your behalf.
Creditors may agree to a settlement amount as they’d rather receive payment for bad debts than nothing. Be aware that this debt relief option may negatively impact your credit score.
Ignore the debt charge-off
Your credit score will continue to suffer if you ignore your debt charge-off, and it won’t stop collectors from hounding you down for payments. Your creditors may even take you to court if you owe a significant amount. If your creditors win the case, they may take your assets and repossess your property to pay off your debt.
How to remove a charge-off from your credit report
While you can’t remove a debt charge-off from your credit report, you can have the charge-off settled or paid, which looks better to creditors and lenders than an unpaid charge-off. Your best bet is to wait for the derogatory mark to fall off your account in the next seven years.
While creditors can’t remove a charge-off from your account unless it’s an error, you may be able to pay to have the charge-off reversed, also known as “pay-for-delete.” With this service, collection agencies will report the charge-off as an error to credit bureaus and have the charge-off erased. However, it’s exceedingly rare for a creditor to perform a “pay-for-delete” because of its ethical and legal implications.
Since they’re no legal basis for a pay-for-delete arrangement, a collection agency can simply refuse to hold up their end of the arrangement after you pay, and you’ll have no way to fight back.
Take action if you have charged-off accounts
Ideally, you’ll want to make the minimum monthly payments to prevent your account from becoming delinquent. However, if you anticipate financial struggles, you can talk to your lender, who may put you on a repayment plan or forgive some of your payments, according to Griffin.
A charge-off can affect your credit score significantly, so it’s crucial to have the issue resolved immediately. The first step is making a plan to have your debt crushed. You can speak to a nonprofit credit counselor who’ll work with your creditors to waive your fees, reduce your interest rates, and create a manageable debt payment plan.
Debt charge-off frequently asked questions (FAQ)
Creditors look more favorably on paid than unpaid charge-offs, so consider paying off your charged-off account.
After several months of missed payments on a delinquent account, your original lender may charge off your debt and sell it to a collection agency. A bill in collections has been delinquent longer than a recently charged-off account if left unpaid. So, an account collection is worse than a charged-off account, according to Griffin.
You generally can’t remove a charge-off from your account. You can have it paid, settled, or wait for the charge-off to fall off in seven years.