Should I Pay Off a Charged-Off Account?

A charged-off account represents a debt a creditor has determined is unlikely to be collected and has removed from their active balance sheets. It means the original creditor has given up on actively collecting the debt from an accounting perspective, marking it as a loss.

Understanding a Charged-Off Account

A charged-off account occurs when a creditor, such as a bank or credit card company, decides that a debt is unlikely to be repaid. From an accounting standpoint, they write off the debt as a loss on their financial records. This action typically happens after a period of prolonged non-payment, often around 180 days of delinquency. While the account is “charged off” by the creditor, the debt itself is not forgiven, and the consumer remains legally obligated to repay the amount owed.

The creditor charges off the account for internal accounting purposes, which can also allow them to claim a tax deduction for the uncollected amount. Even after a charge-off, the original creditor may still attempt to collect the debt internally. Alternatively, the creditor might sell the debt to a third-party debt buyer or assign it to a collection agency. If the debt is sold, the new owner of the debt has the right to pursue collection from the consumer.

How a Charged-Off Account Appears on Your Credit Report

A charged-off account is a significant negative entry on a credit report. It will appear with a “charge-off” status, indicating the outstanding balance and the date of last activity. This negative mark remains on a credit report for up to seven years, calculated from the date of the original delinquency, which is the first time a payment was missed that led to the charge-off. This seven-year period applies regardless of whether the debt is subsequently paid.

If a charged-off account is paid, either in full or through a settlement for a lesser amount, the status on the credit report will be updated. It might change to “paid charge-off” or “settled for less than full balance.” While updating the status to “paid” or “settled” can be viewed more favorably by some lenders than an unpaid charge-off, the original charge-off entry itself is not removed from the credit report before the seven-year period expires.

Verifying and Negotiating the Debt

Before making any payment on a charged-off account, it is important to verify the debt. Consumers have a right under the Fair Debt Collection Practices Act (FDCPA) to request debt validation from a debt collector. This request should be sent in writing within 30 days of the debt collector’s initial contact. The validation should include the amount of the debt, the name of the original creditor, and documentation proving the consumer’s obligation to pay.

If the debt is validated, identify the current owner of the debt. This could be the original creditor or a debt buyer who purchased the account. Consumers can then attempt to negotiate a settlement, often for a reduced amount. Debt collectors or buyers are frequently willing to accept a percentage of the original balance, sometimes as low as 30% to 50%, especially for a lump-sum payment. It is important to secure any agreed-upon terms in a written agreement before making a payment, detailing the exact amount, payment method, and how the account will be reported to credit bureaus.

Completing Payment and Documentation

After verifying the debt and negotiating a settlement, complete the payment and ensure proper documentation. Payment arrangements can vary, including a lump-sum payment or a structured payment plan. Before any money changes hands, obtain a written agreement from the debt holder. This agreement should explicitly state the agreed-upon amount, the terms of payment, and confirm that the payment will satisfy the debt in full.

The written agreement should also specify how the debt holder will report the account to the credit bureaus after payment. Payments should be made through traceable methods, such as a certified check, money order, or bank transfer. Maintaining detailed records of all communications, including the written agreement, payment receipts, and tracking information. After payment, consumers should monitor their credit reports to confirm the account status is updated accurately as agreed upon.