Do I Have to Pay a Charge-Off? The Consequences
Understand the true nature of charged-off debt, its ongoing implications, and your options for resolving this financial obligation.
A charged-off debt signifies an internal accounting reclassification by a creditor, indicating they consider the debt unlikely to be collected. This adjustment does not eliminate a consumer’s legal obligation to repay the money borrowed. It moves the debt from an active receivable to a bad debt expense on the creditor’s financial statements. The amount remains legally due and collectible.
Understanding a Charged-Off Debt
Creditors typically charge off a debt after sustained non-payment, often around 180 days for revolving credit accounts. This aligns with regulatory requirements and accounting principles, allowing the creditor to recognize a loss for tax purposes and present an accurate financial picture. After a debt is charged off, the original creditor may continue collection efforts internally or transfer it to a specialized recovery department. They may also sell the charged-off debt to a third-party debt buyer for a fraction of its face value, who then acquires the legal right to collect the full amount from the consumer. The consumer’s responsibility to repay the obligation persists.
Collection Efforts for Charged-Off Debt
Once a debt is charged off, consumers can anticipate continued efforts to collect the outstanding balance. The original creditor may first attempt collection through their internal department, sending letters and making phone calls. They will request payment in full or offer options for repayment plans.
If unsuccessful, they may engage a third-party collection agency to pursue the debt. These agencies operate under contract and earn a commission on collected amounts. Consumers may then receive communications from these agencies, which are also bound by federal regulations regarding debt collection practices.
The original creditor may also sell the charged-off debt to a debt buyer, transferring ownership. Once a debt buyer owns the debt, they become the new creditor and will initiate their own collection efforts. These efforts can be aggressive, as debt buyers aim to recover as much as possible. Consumers should verify the debt collector’s identity and legal ownership of the debt before engaging in discussions.
Legal Action for Unpaid Charged-Off Debt
Creditors or debt buyers resort to legal action to compel payment if other collection efforts fail. Filing a lawsuit aims to obtain a court judgment against the consumer for the unpaid amount. Consumers receive a summons and complaint, notifying them of the lawsuit and requiring a response within a specified timeframe, typically 20 to 30 days. Ignoring these documents can lead to a default judgment against the consumer.
A court judgment legally confirms the debt and grants the creditor or debt buyer powerful tools for collection. With a judgment, they can pursue various enforcement actions, though the specific methods vary by jurisdiction. Common post-judgment remedies include wage garnishment, where a portion of earnings is withheld by an employer and sent to the creditor. Federal law limits wage garnishment to 25% of disposable earnings or the amount by which disposable earnings exceed 30 times the federal minimum wage, whichever is less.
Another enforcement mechanism is a bank account levy, allowing the creditor to freeze and seize funds from bank accounts up to the judgment amount. Creditors can also place liens on real property, such as a house or land. A property lien creates a legal claim against the asset, which could complicate or prevent its sale or transfer until the debt is satisfied.
Resolving a Charged-Off Debt
Addressing a charged-off debt can mitigate its impact and prevent further collection efforts or legal action. One straightforward option is to pay the full amount owed to the current owner of the debt, whether it is the original creditor or a debt buyer. Paying the entire balance resolves the obligation and removes the debt from active collection.
Many consumers choose to negotiate a settlement for a lower amount than the total balance due. Creditors and debt buyers are willing to accept a reduced sum, especially if they perceive a risk of not collecting anything. Negotiations can result in a lump-sum payment or a structured payment plan. It is crucial to obtain any settlement agreement in writing before making payments.
Consumers should be aware of potential tax implications when a significant portion of a debt is forgiven through settlement. If a creditor forgives $600 or more, they are required to issue a Form 1099-C, Cancellation of Debt, to the consumer and the Internal Revenue Service. The amount forgiven may be considered taxable income. Consulting with a tax professional can help determine the specific tax consequences.