Should I Pay a Charge-Off? Factors to Consider First

A charge-off occurs when a creditor determines that a debt is unlikely to be collected after a prolonged period of non-payment. This is an internal accounting adjustment for the creditor, allowing them to remove the debt from their active books and recognize it as a loss. Despite this classification, the individual who owes the debt remains legally obligated to repay it.

What a Charge-Off Means

A charge-off marks a point in the life cycle of a delinquent debt, typically occurring after 120 to 180 days of missed payments. This signifies that the original creditor no longer expects to collect the money and has written it off as an uncollectible loss. While the creditor may close the account to new charges, the debt itself is not forgiven.

The charge-off will appear on a consumer’s credit report as a negative entry, indicating the account status and outstanding amount. This delinquency harms credit scores. Even though the original creditor may cease direct collection efforts, the debt obligation persists.

Consequences of an Unpaid Charge-Off

An unpaid charge-off carries ongoing repercussions. The original creditor often sells or assigns the debt to a third-party collection agency, sometimes for a fraction of the original amount. This transfer initiates new collection efforts, which can include frequent phone calls and letters from the new debt holder attempting to recover the balance.

Beyond persistent collection attempts, there is a risk of legal action. A debt collector or the original creditor may file a lawsuit to obtain a judgment for the outstanding amount. If a judgment is secured, the collector could pursue measures such as wage garnishment or bank levies. The charge-off remains on credit reports for up to seven years from the date of the original delinquency, continuing to affect creditworthiness. This prolonged negative entry can hinder access to new credit, loans, and potentially impact housing or employment opportunities.

Factors When Deciding to Pay

Deciding whether to pay a charged-off debt involves evaluating several personal financial considerations. Paying a charge-off can improve one’s credit standing over time, as a “paid” or “settled” status appears more favorable on a credit report than an unpaid one. Resolving the debt can also stop collection efforts and prevent potential legal action, offering peace of mind.

However, other factors might influence the decision to pay, such as the statute of limitations. This is a legal time limit within which creditors or debt collectors can file a lawsuit to collect a debt. If the statute has expired, the debt is considered “time-barred,” meaning a collector cannot legally sue for it, though the debt is still owed. Making a payment on a time-barred debt can, in some instances, reset this clock.

An individual’s current financial situation plays a role in this decision. Paying a charge-off may not be feasible if it creates undue financial hardship. The age of the debt also matters, as older charge-offs generally have less impact on credit scores than newer ones, and their effect diminishes over time.

Steps to Address a Charge-Off

Once a decision is made to address a charged-off debt, the initial step involves verifying the debt’s accuracy. Requesting debt validation from the collector confirms the debt’s legitimacy and that the collector has the right to collect it. This ensures that the information on the credit report is correct. If inaccuracies are found, disputing them with the credit bureaus can lead to corrections or even removal.

Negotiating a settlement for less than the full amount is a common strategy, as collection agencies often purchase debts for a small percentage of their face value. It is possible to settle for 30% to 50% of the original balance. While rare, some consumers attempt to negotiate a “pay-for-delete” agreement, where the collector agrees to remove the negative entry from the credit report in exchange for payment. This practice is generally discouraged by credit bureaus.

Before making any payment, it is important to obtain all agreements in writing, detailing the payment amount, the settlement terms, and any agreed-upon credit reporting changes. Documenting all communications, including dates and names, is also advisable. After payment, monitoring credit reports is important to ensure the debt is correctly reported as “paid” or “settled.”