How to Handle Charge Off Accounts on Your Credit Report
Understand and effectively address charge-off accounts impacting your credit. Gain control over these financial challenges and improve your credit outlook.
A charge-off account occurs when a creditor formally removes an unpaid debt from its active accounts, classifying it as a loss for accounting purposes. This indicates a debt has gone unpaid for an extended period, leading the original creditor to cease internal collection efforts.
Understanding Charge-Off Accounts
A charge-off signifies that a creditor has written off a debt as uncollectible, typically after a period of non-payment, often around 180 days. This accounting action does not mean the debt is forgiven; rather, the original creditor no longer expects to recover funds directly.
The charge-off appears on your credit report as a negative entry. This negative mark generally remains on a credit report for up to seven years from the original delinquency date. Its presence can significantly lower credit scores, potentially by hundreds of points, because it signals a failure to meet financial obligations.
After an account is charged off, the original creditor may attempt internal collections for a short period or, more commonly, sell the debt to a third-party debt buyer or collection agency. A new collection account may appear on the credit report in addition to the original charged-off account.
Strategies for Resolution
Addressing a charged-off account begins with gathering specific information. Compile accurate account details, including the original creditor’s name, current balance, and charge-off date. Obtain a current credit report from all three major bureaus (Equifax, Experian, and TransUnion) to verify the entry and its accuracy. Also, understand your financial capacity for payment or settlement, and gather any related documentation.
One strategy is paying the debt in full to the current owner. This changes the account status on your credit report to “paid charge-off,” which is viewed more favorably than an unpaid one. Obtain a written “paid in full” confirmation once payment is complete.
Alternatively, negotiate a settlement for a lower amount. Debt owners may accept a reduced sum, often 30% to 50% of the original debt. Before paying, secure a written settlement agreement detailing the amount and terms. This agreement should specify if the account will be reported as “settled” or “paid in full.” “Settled” indicates less than the full amount was paid.
If a lump-sum payment is not feasible, set up a structured payment plan. This involves arranging smaller, manageable payments over time with the debt owner. A written payment plan outlining the schedule and amounts is necessary to protect you.
Finally, if you believe the charge-off entry is inaccurate or the debt is not owed, dispute it. Send a detailed dispute letter to both the credit bureaus reporting the error and the debt owner. The letter should explain inaccuracies, such as an incorrect amount, identity theft, or an account that does not belong to you, and request correction or removal. Supporting documentation should accompany the dispute.
Dealing with Debt Collection Efforts
When a charged-off debt is acquired by a collection agency, consumers can expect to receive communication through phone calls and letters. These collectors are subject to regulations under the Fair Debt Collection Practices Act (FDCPA), which outlines their permissible actions and protects consumer rights. The FDCPA prohibits collectors from engaging in abusive, unfair, or deceptive practices, such as contacting individuals at unusual times or using threats.
Under the FDCPA, you have the right to request debt validation. Send a written request to the debt collector within 30 days of initial contact, asking for verification of the debt, including the amount owed and the original creditor. Upon receiving such a request, the collector must cease collection efforts until they provide the requested information. This validation process ensures the debt is legitimate and accurately attributed.
You also have the right to stop communication from a debt collector. A written cease and desist letter sent to the collection agency will generally compel them to stop contacting you. This does not eliminate the debt or prevent the collector from pursuing legal action. Sending such letters via certified mail with a return receipt provides proof of delivery. Maintaining all communication with debt collectors in writing is a good practice, as it creates a clear record of interactions and agreements.