If you’ve fallen several months behind on a credit card, you may see the account marked as “charged off” on your credit report. It sounds like the debt was wiped away, but that isn’t what a charge-off means. Here is what happens when an account is charged off, how it affects your credit, and why charged-off debts can often still be settled for less than you owe.
What a Charge-Off Means
A charge-off is an accounting step. When a lender decides a debt is unlikely to be repaid, it writes the balance off its books as a loss. For credit cards, this usually happens after about 180 days without a payment, though some lenders do it sooner. The account is closed to new charges, but you still legally owe the debt.
What Happens to the Debt After a Charge-Off
After charging off an account, the original creditor usually does one of three things:
- Keeps collecting itself through its internal recovery department.
- Hires a collection agency to collect on its behalf.
- Sells the debt to a debt buyer, often for a small fraction of the balance. The buyer then tries to collect the full amount.
Whoever holds the debt can contact you and, if the statute of limitations hasn’t run out, may file a lawsuit. Third-party collectors and debt buyers must follow the federal rules on debt collector harassment and your FDCPA rights.
How a Charge-Off Affects Your Credit
A charge-off is one of the more serious negative marks on a credit report. It can stay on your report for up to seven years from the date of the first missed payment that led to it, even if you later pay or settle it. Its effect on your score fades over time, especially as you add positive payment history on other accounts. Paying or settling the account updates its status, for example to “paid charge-off” or “settled,” which looks better to future lenders than an unpaid balance.
Can You Settle a Charged-Off Debt?
Often, yes. Because the original creditor has already written off the loss, and debt buyers usually paid far less than face value, many are willing to accept less than the full balance. Settlements are commonly paid as a single lump sum or in a short series of payments. See how much credit card companies typically settle for.
Before You Pay a Charged-Off Account
- Confirm who owns the debt. If a collector or debt buyer contacts you, ask for validation so you know the debt is yours, the amount is right and the company has the right to collect it.
- Check the statute of limitations. In some states, a partial payment or written promise to pay can restart the time limit for a lawsuit. Learn how the statute of limitations on debt works before you pay anything on an old account.
- Get the agreement in writing. Before sending money, get a written settlement agreement that states the amount, the payment dates and that the payment resolves the debt in full.
- Plan for taxes. Forgiven debt of $600 or more is generally reported on Form 1099-C and may count as taxable income. Read whether settled debt is taxable.
- Keep proof. Save the agreement and payment confirmations in case the debt is ever sold or reported incorrectly again.
Frequently Asked Questions
Do I still owe a charged-off debt?
Yes. A charge-off is an accounting entry by the lender. It doesn’t cancel the debt, and you can still be asked to pay it or be sued for it.
Will paying a charge-off remove it from my credit report?
Usually not. Paying or settling updates the status, but the charge-off generally stays on your report for up to seven years from the original delinquency.
Is it better to settle before or after a charge-off?
It depends on your situation. Some creditors negotiate before charge-off, while others offer bigger discounts afterward. A debt professional can help you weigh the timing, the credit impact and the risk of a lawsuit.
Related reading: Does Debt Settlement Hurt Your Credit? · What to Do When Your Debt Is Sent to Collections · Which Debts Can Be Settled?
Get Help With Charged-Off Debt
If you have one or more charged-off accounts, Alliance Settlement can review them with you and explain whether settlement makes sense. Request a free consultation.
This article is general information, not legal or tax advice.
