What Does ‘Charged-Off As Bad Debt’ Mean?

Many people get into situations where making the required minimum payments on car loans, credit cards, personal loans and medical bills is very difficult. Unfortunately, if a loan is delinquent for a few months, it can be charged off as bad debt. Charged-off debt can have a severely negative impact on your credit score for years to come. Therefore, it’s helpful to understand what a charge-off is and how to avoid it.

What Is A Charge-Off?

A charge-off, also known as a write-off, happens when a debtor or lender has written off a debt as a loss because it doesn’t think it will be paid. As a result, the account is closed for future use, but you are still responsible for paying back the debt – the charge-off doesn’t mean the creditor absolved you from paying it back.

Debtors and lenders use charge-offs when accounts are seriously delinquent and minimum payments haven’t been made. Also, the debtor can still sell the unpaid debt to a collection company, and they make still take steps to collect on the charged-off account.

Unfortunately, a charge-off in your credit history can seriously damage your credit score, making it more challenging to get a loan and secure favorable interest rates in the future. If you have a charge-off, resolving the debt with the original lender or collection agency is essential for repairing your credit.

Why Do Charge-Offs Happen?

Debt is considered an asset to lenders and debtors, so they are taxed on it. Companies write off debt for accounting purposes to remove it from their books under accounts receivable, but you are still responsible for the uncollected debt.

The general time frame for a charge-off is usually around 4 – 6 months after your account has become delinquent. Various types of debt can result in a charge-off, including credit cards, auto loans, medical bills, mortgages, household debt and private student loans.

How Does A Charge-Off Work?

If you have fallen behind in your payments on a credit account for several months, the creditor may notify you, or you may see a line on your credit report that they charged off the debt. However, the term “charge-off” is more related to the accounting, and you are still legally liable to pay the debt. Contact the creditor or debt collector that owns the loan to make payments on your charged-off account.

In some cases, it might not be necessary to pay the full amount. For example, if a collection agency owns the loan, it might be more open to accepting less than the total debt as payment because it probably bought the loan for a small fraction of the total debt amount. You will need to work with the loan owner to determine what your situation requires.

How Does A Charge-Off Affect Your Credit?

Many debt collectors and lenders report a charge-off to the credit reporting bureaus, causing it to appear on your credit report. Charged-off accounts can lower your credit score and can stay on your credit report for up to 7 years. However, if you resolve the debt with the creditor or collection agency, the charged-off debt will appear as “paid” on your credit report.

How Long Does A Charge-Off Stay On Your Credit Report?

Charge-offs can stay on your credit report for up to 7 years, like most negative items, including late payments, foreclosures, and collection accounts. The 7-year period usually starts on the date of the first late or missed payment on the charged-off account.

Can You Remove Charged-Off Debt From Your Credit Report?

Yes, getting a charge-off deleted from your credit history is sometimes possible. First, determine who owns the debt, which might be a collection agency and not the original lender, and get as much information on the loan as possible. Next, contact the entity that owns the loan to negotiate a pay-for-delete arrangement that removes the charge-off notation from your credit report. This may not always be an option and will depend on your unique situation.

What Are The Legal Implications Of A Charge-Off?

Nonpayment of a charged-off account can result in legal action, and the debtor can sue you. If there is a court judgment, it might be possible to freeze your bank account or garnish your wages. The court might issue a default judgment against you if you don't respond to the lawsuit.

In addition, charged-off debt is subject to a statute of limitations, often between 3 and 6 years in most states but sometimes 10 or 15 years. This can vary depending on the state where you live, the state mentioned in the credit agreement, and the type of debt.

You cannot be sued for old debt that is “time-barred," which means the statute of limitations has expired. But, the start of the debt statute of limitations period varies and is sometimes when you missed your first required payment, when you made your last payment, or there was any action on the account. Discussing your situation with an attorney and getting professional legal advice might be helpful.

What To Do With A Debt That’s Charged Off As Bad Debt

Here are the steps involved in handling charged-off accounts.

1. Verify That The Charge-Off Is Legitimate

Get as many details on the charged-off account as possible to determine if it’s accurate and verify that this matches what is displayed on your credit report. Contact the credit bureaus to dispute the information if the charge-off is inaccurate. If the charge-off is due to fraudulent activity, report it immediately to the FTC.

2. Check If The Debt Is Past Its Statute Of Limitations

Conduct research to determine if the statute of limitations has passed, which is up to 15 years in some states. Keep in mind that the period may begin on the date of your last activity on the account and not necessarily the first missed payment. Once the debt is past its statute of limitations, you technically still owe the money, but can’t be sued by the creditor over it.

3. Pay Off The Debt

Determine who owns the debt account before making payments or negotiating, which might be a debt collector and not the original creditor. You might be able to create a payment plan, or a debt collector might be open to accepting less than the full amount to settle the debt. Be sure to get a payment agreement in writing and documentation that you paid off the bad debt.

4. Check Your Credit Report For Updates

Credit reports are updated roughly every 30 – 45 days. If you have resolved the charged-off debt, make sure that your credit history reflects this by stating “paid” after the charge-off. Otherwise, contact the credit bureaus with documentation that you resolved the loans.

If you negotiated a pay-for-delete arrangement and fulfilled your end, ensure the credit bureaus removed the charge-off notation from your report. Otherwise, contact the creditor if the charge-off wasn’t properly deleted from your report.

How To Avoid Charge-Offs

Here are some helpful strategies for avoiding future charged-off accounts.

• Create and stick to a budget: Beware of spending more than you can afford by effectively budgeting your money.
• Refrain from taking on more debt: Avoid taking on loans that could result in future charge-offs.
• Consider a debt management plan or credit counseling: Both a debt management plan and credit counseling can be valuable tools for creating a path out of debt.
• Review your credit report for possible identity theft: If you find fraudulent activity on your credit report, report it immediately to the FTC and follow their recovery plan.

Charged-Off As Bad Debt FAQs

Let’s examine some of the common questions related to charge-offs.

Does a charge-off mean I don’t have to pay off the debt?

No, you are still liable to pay regardless of it being charged off. The account is closed for future use, and you are responsible for paying back the debt.

Can my account still be charged off if I’ve been making debt payments?

Yes, if you are paying less than the required monthly minimum payment and your account becomes delinquent, it can be charged off. Likewise, if you have filed for bankruptcy, the debtor can charge-off the loan.

What does a charge-off look like on a credit report?

A charge-off will appear on your credit report with a note or label stating it was charged off. Once you pay off the debt, your credit report should be updated to state your charge-off has been paid.

Can I negotiate a charge-off?

Some creditors are willing to create payment plans, and some collection agencies may accept less than the original loan amount to resolve the debt. Be sure to get all verbal agreements in writing as documentation.

What happens after I pay off the bad debt?

Once you have settled the debt, collection agencies should stop contacting you about the loan, and it should display as “paid” on your credit report. However, it can often take 30 – 45 days to update your credit report.

The Bottom Line: Avoid Charge-Offs Whenever Possible

Charged-off debt can very negatively impact your credit rating and decrease your future opportunities to borrow money, so it’s important to avoid it. And even if a debt was charged off, you are still legally liable for it. Living within your budget and making at least the minimum payment on your accounts is critical for avoiding charge-offs.

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