What Is a Charge-Off?

If you’ve been struggling to pay off a debt, you may now have a charge-off on your credit report. A charge-off signals to potential lenders that you’re a risky borrower. But what exactly is a charge-off? Read on to learn how a charge-off works – and whether it’s possible to have one removed.

“A charge-off is basically a creditor writing the debt off in their books as uncollectible,” says Leslie Tayne, debt resolution attorney at Tayne Law Group in New York and author of the money management book “Life & Debt.” “This usually occurs when you are very delinquent on payments, but the amount of time changes depending on the creditor. The creditor may have tried to collect and has not been successful.”

When you borrow money, you’re expected to pay back the debt according to the terms of a contract. Of course, life doesn’t always go according to plan, and it’s possible that you make a late payment or miss it altogether. This can result in a late fee and a hit to your credit.

If you continue to miss payments, that debt is then considered delinquent and may eventually be sent to an internal collections department or sold off to a third-party debt collection agency. At this point, the debt collector will continue to attempt to collect the debt from you. However, if those attempts are unsuccessful, it could be charged off as bad debt.

Depending on the type of account, your creditor will charge off your bad debt 120 or 180 days after you stop making payments. This is noted on your credit reports as well.

An account that has been charged off as bad debt, as well as any related collection account, may stay on your credit report for seven years from the date of the delinquency that led to the charge-off – regardless of whether you subsequently repaid the debt.

“Creditors, especially credit card companies since they don’t have the option of repossessing your car, don’t like to do this,” says John Ulzheimer, a credit expert, formerly with FICO and the credit bureau Equifax. “They would much rather you paid them than default.”

If you decide to pay an account after it’s been charged off as bad debt, it doesn’t remove it from the credit report. Instead, your credit report will still show that it was once a charge-off but has since been paid. Future lenders see this distinction as more favorable, compared with a charged-off account marked settled, since a settled account indicates you didn’t repay the full balance that you owed.

Generally, a charge-off just subtracts more from your already-dropping credit score. Once you get to the point of a charge-off, the months of delinquent payments leading up to it have already damaged your credit history.

While a charge-off means that your creditor has reported your debt as a loss, it doesn’t mean you’re off the hook. You should pay charged-off accounts as well as you can.

“The debt is still the consumer’s legal responsibility, even if the creditor has stopped trying to collect on it directly,” says Tayne. “It may be tempting, then, to just never pay it, but the charge-off will continue to affect you and is likely reported on your credit.”

You can be sued by a creditor after a charge-off, up to a defined statute of limitations, which varies by state and by the type of debt. In most states, the statute of limitations for suing for an unpaid debt is three to six years.

If you believe the charge-off on your credit report is a mistake, immediately initiate a dispute investigation online with the credit reporting agency. You should also notify the creditor that you are disputing the charge-off. You’ll need to gather documentation, such as proof of payments or evidence of identity fraud, to support your dispute.

“If the account isn’t yours, your payments were misapplied or you suspect fraud, then you need to challenge this with the creditor or go to all three credit bureaus,” says Ulzheimer. “It’s more efficient to go directly to the creditor, since they have to correct it with all of the credit bureaus that have the incorrect information.”

If the charge-off is correct, you can sometimes negotiate a repayment plan. It’s rare to have a legitimate charge-off removed from your credit report, but it’s possible to request that during negotiations, says Ulzheimer.

“There’s nothing that requires a credit reporting agency to remove it even one day earlier than seven years as long as it is correct,” Ulzheimer says. “It’s best to pay off the debt or settle it with the creditor for a lesser amount and then work to rehabilitate your credit with on-time payments on other accounts.”

If you can’t pay the balance in full, try to start negotiations with the creditor.

“You can only negotiate with the current creditor, not the original bank or lender,” says Ulzheimer. “Debt collectors are legally not allowed to lie to you, so you can ask them if their company owns the debt or someone else owns it.”

Creditors want to talk to you if you let them know you want to discuss a debt settlement.

Your ability to negotiate depends in part on how old the debt is, the size of the balance and whether the creditor thinks you have the means to pay.

“Debt collectors can pull your credit report and see if you have another way to pay, such as an open credit card account with an available balance,” says Ulzheimer.

If the debt is owned by a collection agency, that probably means the agency purchased it for a small percentage of the balance and may be willing to accept less money from you, he says.

Ulzheimer suggests offering to pay 25% of a large balance as a starting point, recognizing that the agency will likely want you to pay much more. If the balance is small, such as $300, the agency is likely to require payment in full.

“You can try to negotiate a pay-for-delete arrangement, which means your repayment is contingent on the removal of the charge-off from your credit report, but that happens very infrequently,” says Ulzheimer.

Any negotiation should be confirmed in writing. The creditor should clearly state that you don’t owe more money, that collection activity will cease and that your credit reports with all three agencies will be updated with a zero balance, says Ulzheimer.

If you have an unpaid charge-off, there are no tax implications when you file your tax return. However, this changes if you successfully negotiate a charge-off settlement for less than the full amount of your debt.

“If you settle your debt after a charge-off, you would be issued a 1099-C form from the creditor as long as the amount paid to the creditor or collector includes a savings off the balance of $600 or more,” says Tayne. “Therefore, the difference between what you owed and what you settled for may be considered taxable income.”

A charge-off is a serious financial problem that can hurt your ability to qualify for new credit. “Many lenders, especially mortgage lenders, won’t lend to borrowers with unpaid charge-offs and will require that you pay it in full before they approve you for a loan,” says Tayne.

While you may not be able to remove a legitimate charge-off from your credit report, finding a way to pay the debt in part or in full is an important step toward rehabilitating your credit.

“The biggest benefit of paying in full or settling a charge-off is that you won’t be sued for the debt and you stop accruing interest on the debt,” says Ulzheimer. “In addition, you should feel a sense of accomplishment that you closed the loop on that problem and that you will avoid repeating your mistake in the future.”