What Does Charge Off Mean?: Damages to Your Credit Report & How to Recover
Updated: Feb 2, 2022
Receiving a notice like this – "Your account has been charged off!" – might be the answer to your prayers if you're having trouble making credit card payments.
It is far from the case. Despite popular belief, that isn't accurate.
The phrase "charge-off" refers to a situation in which the entity that granted you the loan, usually a credit card company or a shop, has written off the amount due as uncollectible, canceled your account, and declared it a loss.
However, the obligation remains unpaid. In addition, your credit score will be significantly harmed.
That's the menacing dark cloud that hangs over those who can't or won't pay their debts. Lenders have the option to charge off accounts when customers fail to pay for 180 days in a row.
If you pay back the loan sooner, the lender reports it to the three major credit reporting agencies — Experian, TransUnion, and Equifax — and it stays on your credit profile for 7 years.
To put it more simply, if you pay back the loans 2 years after it has been charged off, the negative impact on your credit score will continue another five years, making your credit score decline for another five years, making it more challenging to obtain a mortgage, auto loan, or even a debt consolidation line of credit.
What Should I Do If My Account Has Been Charged-Off?
You still owe the amount after a charge-off, and it can be recovered by the original creditor or a collection agency.
The original creditor may try to recover the amount, but a collection agency is hired to pursue the debt in most cases. Even more commonly, the creditor sells the debt to the collection agency (typically for pennies on the dollar) and walks away from the situation.
There are numerous choices open to you once you receive news that your account has been charged off:
Attempt to reach an agreement with the original creditor or collection agency to settle the debt.
Become a member of a debt management program.
Make an attempt to pay your debt for a lower amount than you owe.
Wait seven years for the account to be erased off your credit record if you do nothing.
Make a Debt-Reduction Strategy
Resolving the debt with the original investor is the best choice. In an ideal world, you would be able to pay off the debt altogether. If this occurs, double-check that the amount was paid in full on your credit report.
If it fails, you should contact the creditor directly or engage an attorney to arrange an acceptable settlement for both parties.
Before you begin, figure out how much you can spend every month. Only commit to paying what you can afford every month. When you've done negotiating and are pleased with the arrangement, have the creditor/collection agency put it in writing and sign it. When dealing with a collection agency, never send money without first seeing a written agreement.
Debt is frequently sold from one firm to the next. Debt collection companies can purchase and sell debts without informing you, so be sure you pay the right company. If you have any doubts, you may always ask for proof that the debt belongs to the firm.
DMP Can Assist With Charge-Offs
If dealing with charge-offs is overwhelming you, you should seek assistance from a non-profit credit counseling organization. Credit counselors may assist you in better understanding money management, creating a budget, and, if necessary, enrolling you in a debt management program (or DMP).
A DMP is an agreement between both parties to pay off the debt in total over a certain period. The credit counseling organization may be able to persuade the lender to lower their interest rates and cut late fees and other penalties, allowing you to resolve the problem in three to five years.
You may ask the credit bureaus to alter the account status to "paid in whole, balance zero" once you've paid off the entire debt. Although the account will remain charged off for another seven years, your credit score will improve, and future lenders will view your situation more positively.
Another alternative is debt settlement, although it is fraught with danger. When a lender agrees to settle outstanding debt for less than what is owed — often considerably less — it is called debt settlement. Some financial institutions refuse to engage with credit counseling firms.
Another disadvantage of a debt settlement is that if a portion of your debt is forgiven or canceled, you may be required to record it as "income" and pay the necessary taxes.
Finally, debt settlement hurts credit ratings, which can be significant. Before making a final choice, it is a viable option, exploring alternatives like debt consolidation and a debt management plan.
Limitation of Liability by Statute
You have surrendered if you take the "do nothing" attitude. For seven years, the fact that you did not pay a debt remains on your record. It's pretty improbable that you'll be given credit within that period.
The best part is that every jurisdiction has a "statute of limitations" which prohibits collection agencies from suing you in court once a certain length of time has elapsed. The statute of limitations varies by state, although it usually lasts between three and six years. Collection agencies can try to collect on unpaid debts indefinitely, but there is no way to force you to settle when there's no court ruling against you. The debt is almost impossible to collect.
So, while a charge-off will remain on your credit record and score for seven years, the debt itself may be gone after six.
Also, acquire your free yearly credit report from each of the three credit bureau reporting organizations to ensure that your account doesn't show a charge-off that never occurred. Such errors certainly happen, but only you can recognize and correct them.
Could charge-offs have a negative impact on your credit score?
Charge-offs can have a significant and negative impact on a borrower's credit rating and score.
Every charged-off account is submitted to the credit bureaus and remains on your credit file for seven years, making it more difficult to acquire new credit. It sends out a warning signal to future lenders, implying that you have disregarded your financial responsibilities and the chance to work out a satisfactory settlement with a prior lender.
That is why it is a good idea to try to settle a credit card debt before it is charged off because you have defaulted on your account. Call your credit card customer care department and ask to talk with someone in the settlements department if you want to settle your credit card debt for less than you owe. You'll need to explain your position and tell the individual you'd like to pay the account with the maximum amount of cash you can afford.
Although your credit card issuer could refuse to accept a partial payment, you may be able to negotiate for a lump-sum fee, a modification of your payment conditions that allows you more time — generally an additional 90 days — or a mixture of the two to satisfy your account before it becomes charged-off.
Many major credit card issuers, such as Bank of America, Chase, Citibank, Capital One, and Discover, allow you to combine pre-charge-off settlements with payment arrangements to help you pay off your debt.
For example, let's say you owe $5,000 on your credit card, and your bank enables you to settle the debt for $2,400, but you've missed five payments in a row. To avoid a charge-off, the bank will prolong the time you have to repay the loan by requiring you to agree to pay $800 a month for the following three months, which is two months longer than the typical 180 days before an account is charged off.
You must, however, stick to the new payment conditions once you agree to them since you will not be allowed any further leniency.
Can I Really Improve My FICO Score?
Unless you get a charged-off account erased from your credit report, it will have a long-term impact on your credit score. It will take a substantial effort and time, and this will not always be possible.
It is possible to pay to get it removed.
Request that the charge-off is erased from your credit record in return for agreeing to pay the bill. You can pay the total amount or set up a direct debit, but you must get a formal assurance from the creditor that the debt will be erased from your credit report.
Credit bureaus should be contacted to dispute the charge-off.
You have the right under the Fair Credit Reporting Act to write to the credit bureaus and dispute mistakes in your credit report. Make that the balance is proper. If the loan was sold to a debt collector, the original creditor's balance must be zero. If you don't, it will affect your credit usage. Check for late-fee penalties by double-checking dates. After a dispute is lodged, the credit bureau gives the debt collector 30 days to verify the debt.
Adjustment for goodwill
When late payments are removed from credit records due to a personal hardship, goodwill adjustment letters are utilized. To check whether you can use one to erase a charged-off account off your credit file, it's worth the try. If you've been a model customer and faced unexpected difficulties, such as medical costs or job loss, your chances are better.
A goodwill amendment could be used to compensate for a genuine error. Maybe you moved and forgot to update your address, so you never got your bill. If you negotiate a payment to correct your mistake, the credit bureaus may remove your account.
If everything else fails, you'll have to wait. Charged-off accounts remain on your credit record for seven years, but their influence on your credit score diminishes with time, becoming practically non-existent by the fifth year. Continue to make on-time payments on all bills, and your credit score will improve.
The Benefits and Drawbacks
The main benefit of settling before a charge-off is that your credit score will not suffer as much damage as it would if you waited too long to deal with your delinquent account. Furthermore, banks are more convenient to work with than collection agencies.
If your account is charged off and transferred to a collection agency, you will almost certainly be subjected to increasingly aggressive methods. If your property is assigned to an attorney, you face the risk of legal action.
The disadvantages: settling with a bank may cost more than paying with a bill collector, and you will have less time to come up with the settlement money. Furthermore, some banks will only engage with you directly to settle a debt before it is charged off, rather than through debt settlement firms. If you're dealing with a debt reduction company, make sure you first inquire about their practices with your creditors.
However, in most cases, it is still a good idea to pay off your credit card debt before it is charged off or go through credit restoration if you failed to pay.