What Is Charged-Off Debt? | How It Affects Your Credit
Did you know that making debt payments on time plays a significant role in your credit score? Missing a payment can bring your score down several points, and the longer you put off making payments, the more your credit suffers.
Late payments bring on a slew of penalties, including:
- Late fees
- Increased interest rates
- Higher debt levels
- Notes on your credit report
It can also lead to your debt being labeled as “charged-off.” This slippery slope can bring on harassing debt collector phone calls, garnished wages, and a severe notation on your credit report.
The best way to avoid having a charged-off debt is to understand what charged-off means and how it can affect your financial standing.
What Does Charged Off as Bad Debt Mean?
If you fail to make minimum payments on your credit card for 180 days, your credit company will consider your debt a “loss asset,” or an asset that is uncollectible and considered a “bad debt.”
This means that the credit company no longer believes that you will pay the debt back, and will consider the debt a loss on their profit-and-loss statement. Your creditor will then close your account and may sell your debt to a collections agency.
What is Bad Debt?
Bad debt is the term used by creditors for debt amounts they consider to be uncollectible. They may also refer to these uncollectible amounts as “accounts uncollectible,” or “uncollectible debts.”
A debt becomes uncollectible when:
- The borrower cannot be contacted over a period
- The borrower refuses to pay
- The borrower declares bankruptcy
- The borrower does not have money to pay the debts
There are several types of debt that can be considered bad debts. These include:
- Credit card balances
- Mortgage loans
- Personal loans
- Any other unsecured loans
Companies understand that every loan or credit line runs the risk of becoming uncollectible. However, if they do not have the in-house resources to pursue an unpaid account, it is in their best interest to label the account as uncollectible.
Lending companies have two options for recording bad debt. One option is to use the direct write-off method, which identifies the debt as uncollectible and can be used for income tax purposes. The second option is the allowance method, a method that allows the company to place the bad debt amount into an estimated allowance for uncollectible accounts within their accounts receivable.
How Does Charged Off Debt Affect Your Credit?
Charged-off debts can affect your credit both directly and indirectly. When your debt is charged-off, you receive a “charge off” notation in your credit history. This notation stays on your credit report for seven years, starting from the date of the last scheduled payment you didn’t make.
Paying the charged-off amount will not remove the notation from your credit report. Instead, the notation will be changed to “charged-off paid” or “charged-off settled.” This notation will remain on your report for the remaining 7 years after the final missed payment.
When your creditor charges off your debt, they may sell it to a collections agency. If it is sold, you’ll have an “account in collections” notation on your credit report. This will cause your credit score to drop.
Can You Get Charge-Offs Removed From Your Credit Report?
The first step in removing a charged-off account from your credit report is to verify your debt with a validation letter. You’ll want to make sure that:
- You know what company currently owns your debt
- Only the current company has an open account in your name
- The outstanding balance is correct
- The dates are correct
If there is an error, contact your credit agency to discuss making changes. You should also file a dispute with the credit bureaus to make sure that all updates are completed.
If there is no error, your charged-off notation will remain on your credit report for 7 years.
However, if your debt has not been sold to a third party, you can try to negotiate full repayment with your original creditor in exchange for the notation to be removed. This is not a guaranteed solution, but it is an opportunity to avoid falling deeper into debt and ruining your credit.
Once the debt has been sold, the notation cannot be removed.
Do You Have to Pay a Charged-Off Account?
Having a charged-off debt can have a huge negative effect on your life; you may have trouble opening new lines of credit, and you may see your credit scores continue to fall. Your goal at this time should be to get out of debt fast.
Making on-time payments is the best way to handle a charged-off debt. There are several ways to go about paying off this debt. You can:
- Work with the original lender by setting up a payment plan
- Make payments to the collections agency that owns your debt
- Enter into a debt management plan
- Work out a debt settlement with your lenders
- File for bankruptcy
Once you’ve paid off the debt, you should receive a final payment letter from whoever owned the debt last. This document will help if there are any errors on your creditor report, or if the notation is not updated when the debt is paid.
Get Help With Your Credit and Debt
Taking charge of your credit with a charged-off debt is possible. Our debt coaches are here to help you find solutions to your unique debt needs and get you back on track. Reach out to learn how you can conquer your credit card debt today.
