Should You Pay a Charge Off in Full or Settle?

What a Charge-Off Is

A charge-off occurs when a creditor determines that an outstanding debt is unlikely to be collected. This often happens after about 180 days of non-payment. From an accounting perspective, the creditor writes it off as an uncollectible asset. This internal accounting adjustment does not, however, absolve the borrower of their legal obligation to repay the debt.

The original creditor may cease active collection efforts once a debt is charged off. They may then sell the account to a debt buyer or collection agency for a fraction of its value. This transfer means that a new entity now owns the debt and has the legal right to pursue collection from the borrower. While the original creditor no longer expects to collect, the debt remains legally valid and owed.

How a Charge-Off Affects You

A charge-off harms an individual’s financial standing and credit profile. Once charged off, it is reported to credit bureaus as a negative mark. This entry can remain on a credit report for up to seven years from the original delinquency date, impacting credit scores. The presence of a charge-off signals to potential lenders a high risk of default, making it challenging to obtain new credit.

Individuals with a charged-off account may find it difficult to secure loans, credit cards, or lines of credit, or they may be offered less favorable terms, such as higher interest rates. Beyond lending, a charge-off can influence renting an apartment or passing employment background checks, as these often involve a credit history review. While the original creditor may cease direct collection, the debt often transfers to a collection agency, leading to persistent calls, letters, and potential legal actions.

Considerations for Paying

Deciding whether to pay a charged-off debt involves evaluating personal financial circumstances and long-term goals. Paying a charged-off account, whether in full or as a settlement, can lead to an update on your credit report, typically changing the status from “charged-off” to “paid” or “settled for less than the full amount.” While the charge-off itself remains on your credit report for up to seven years, a “paid” status is generally viewed more favorably by lenders than an unpaid one, potentially aiding in future credit applications. Resolving the debt can also eliminate the risk of legal action from collection agencies, which could result in a court judgment and subsequent wage garnishment or asset seizure.

Conversely, immediate payment might not always be the optimal first step, particularly if the debt is very old. There are time limits, established by state laws, during which a debt collector can initiate a lawsuit to recover a debt. If the debt has passed this time limit, known as the statute of limitations, a collector may still attempt to collect, but their ability to sue is diminished. Even if a debt is past this time limit, it remains on your credit report for the full seven-year period from the original delinquency date, continuing to affect your credit score. If your financial situation is precarious, addressing essential living expenses might take precedence over paying an old charged-off debt.

The decision to pay or settle also hinges on your financial capacity and willingness to negotiate. Settling for less than the full amount can be a viable option if you have a lump sum available, providing relief from the debt burden. Any debt forgiven through a settlement might be considered taxable income by the Internal Revenue Service if it exceeds $600. Ultimately, the choice to pay or settle a charged-off debt should align with your individual financial strategy, whether it prioritizes credit score improvement, avoiding legal risks, or managing immediate financial constraints.

Proceeding with Payment

Once you decide to address a charged-off debt, verify its legitimacy and ownership. Request a debt validation letter from the collection agency or debt buyer, detailing the original creditor, amount owed, and proof of ownership. This validation ensures you pay the correct party for the correct amount, and it is a right under consumer protection laws. Do not make any payments until you have received and reviewed this documentation.

After validating the debt, you can begin negotiations with the collection agency or original creditor. Many agencies are open to settling for a reduced amount, especially if you can offer a lump-sum payment. Negotiate an affordable settlement, often between 40% and 60% of the original debt. During negotiations, also discuss how the account will be reported to the credit bureaus once paid; ideally, you want it reported as “paid in full” or “settled for less than the full amount” to reflect positively on your credit report.

Get all agreed-upon terms in writing before making any payment. This written agreement should detail the settlement amount, the date of payment, and the agreed-upon reporting status to the credit bureaus. Without a written agreement, there is a risk that the agency might not honor the terms or could continue to pursue the full amount. When making payment, use a secure and traceable method, such as a cashier’s check, money order, or direct payment through the agency’s official portal, and retain all payment records. Following payment, monitor your credit reports for several months to ensure the account status is updated accurately according to your written agreement.