Can I Pay a Charged-Off Account and How?

A charged-off account represents a debt that a creditor has deemed unlikely to be collected. This accounting measure occurs after a period of prolonged non-payment, signifying a loss on their financial records. While this action impacts the creditor’s internal accounting, it does not absolve the borrower of their legal obligation to repay the debt. Understanding charged-off accounts and resolution options can help address the financial obligation.

Understanding a Charged-Off Account

A charged-off account means the original creditor has removed the debt from its active accounts receivable and classified it as a loss. This happens after a significant period of missed payments, often between 120 to 180 days for revolving credit accounts.

Once an account is charged off, the original creditor may continue collection efforts directly, or they may sell the debt to a third-party debt collector or debt buyer. Debt buyers acquire these debts for a fraction of their original value and then attempt to collect the full amount or a negotiated settlement from the borrower.

A charged-off account is reported to national credit bureaus and appears as a negative entry on a credit report. This action follows several months of missed payments, which would have already negatively impacted the borrower’s credit score. The presence of a charged-off account on a credit report can make it more challenging to obtain new credit or loans.

Resolving a Charged-Off Account

A charged-off account can be paid, and doing so can prevent further collection efforts. The first step involves identifying the current holder of the debt, which could be the original creditor, a collection agency, or a debt buyer. This information can be found on a credit report or by contacting the original creditor directly. Once identified, contact can be initiated to discuss resolution options.

Before making any payment, verify the debt by sending a written request for validation to the debt holder. This request, a debt validation letter, asks for specific information, such as the amount owed, the name of the original creditor, and proof that the debt collector has the right to collect. Sending this request within 30 days of the debt collector’s initial communication can legally require them to cease collection efforts until they provide validation. This step helps ensure the debt is legitimate and accurate.

Several approaches exist for resolving a charged-off account. One option is paying the full amount owed, which stops collection efforts and prevents additional fees or interest. While the charge-off itself remains on the credit report, paying it in full can be viewed more favorably by future lenders than an unpaid debt.

Negotiating a settlement for a lesser amount is another common strategy. Debt holders, especially debt buyers, may be willing to accept a percentage of the original balance, sometimes ranging from 30% to 50%. It is advisable to start negotiations with a lower offer, such as 25% to 30% of the balance, and be prepared to negotiate upwards.

When negotiating a settlement or payment plan, obtaining all agreements in writing before making any payments is important. This written agreement should detail the agreed-upon payment amount, the payment schedule, and how the debt will be reported to credit bureaus upon resolution. A payment plan allows the borrower to repay the debt over time, typically ranging from 12 to 36 months. Payments should be made in a traceable manner.

Reporting After Resolution

After a charged-off account has been resolved, its status on a credit report will be updated, though the original charge-off entry will remain. If the full amount is paid, the account will be reported as “paid charge-off” or “paid in full.” This status indicates that the borrower has satisfied the debt completely, which is viewed more favorably by lenders than an unpaid charge-off.

Conversely, if the debt is settled for less than the full amount, it will appear on the credit report as “settled” or “paid less than the full balance.” While settling is a positive step compared to leaving the debt unpaid, it signals that the original terms of the debt were not met. Both paid-in-full and settled charge-offs remain on the credit report for approximately seven years from the date of the original delinquency.

Obtain written confirmation of the payment and the agreement from the debt holder once the debt is resolved. This documentation serves as proof of resolution in case of future discrepancies. Borrowers should then regularly check their credit reports from all three major credit bureaus to ensure the account status is updated accurately. Errors can occur, and disputing incorrect information on a credit report is a right.

While resolving a charged-off account will not immediately remove it from a credit report, changing its status to “paid” or “settled” can contribute to credit score improvement over time. The negative impact of the charge-off lessens as it ages on the report. Focusing on responsible credit management after resolving the debt, such as making timely payments on other accounts, further supports credit rebuilding efforts.