What Does a Charged Off Credit Card Mean?

A charged-off credit card account occurs when a credit card issuer determines a debt is unlikely to be collected, moving it from an active receivable to a recognized loss. Understanding this concept is important for personal financial health, as it carries significant implications for one’s credit standing and future borrowing capabilities. Knowing what a charge-off signifies is a key step in navigating potential financial challenges.

Understanding a Charged-Off Account

A charged-off credit card account is a creditor’s declaration that a specific debt is uncollectible. This accounting procedure formally writes off the debt as a loss. It typically occurs after about 180 days of non-payment.

The decision to charge off a debt is driven by accounting practices and regulatory requirements. While the creditor recognizes the debt as a loss, this action does not forgive the debt. The consumer remains legally obligated to repay the outstanding balance.

The charge-off process allows the creditor to remove the delinquent account from active assets, which can have tax implications. Despite this reclassification, the debt is still valid and can be pursued for collection. The creditor’s perspective shifts from actively pursuing payments to acknowledging the unlikelihood of recovery.

Impact on Your Credit

A charged-off account is a severe negative entry on a consumer’s credit report. This derogatory mark signals to potential lenders that the individual defaulted on a debt. It appears on the credit report with notations like “charged off,” “account closed by grantor,” or “profit and loss write-off.”

This status significantly damages credit scores, potentially causing a substantial drop of 50 to 150 points. The exact impact depends on factors like the individual’s credit history and score before the charge-off. Payment history is a primary factor in credit scoring models, accounting for a significant portion of the score.

A charged-off account remains on a credit report for up to seven years from the date of the first delinquency that led to the charge-off. Even if paid, the charge-off entry remains on the report, though its status may update to “paid charge-off” or “settled.” This updated status, while still derogatory, may be viewed more favorably by some lenders. A charge-off makes it challenging to obtain new credit, such as loans or additional credit cards, and may result in less favorable interest rates.

What Happens to the Debt

Once a credit card account is charged off, the debt does not disappear. The original creditor retains the right to collect the amount owed. It is common for the original creditor to sell the charged-off debt to a third-party debt collector or debt buyer.

Debt buyers acquire the debt for a fraction of its original value, sometimes for pennies on the dollar. Upon purchasing the debt, the debt buyer assumes the right to pursue collection from the consumer. This means the consumer will likely be contacted by the debt buyer rather than the original creditor.

Collection efforts by debt buyers can include phone calls, letters, and legal action. A debt buyer may initiate a lawsuit to collect the debt, and if successful, could obtain a judgment allowing for wage garnishment or other enforcement methods, depending on applicable laws. The sale of the debt merely transfers ownership; it does not negate the consumer’s obligation to pay.

Options for the Consumer

Consumers whose credit card accounts have been charged off have several choices for addressing the outstanding debt. One option is to pay the debt in full, remitting the entire balance owed to the original creditor or current debt owner. While paying in full does not remove the charge-off from the credit report, it updates the entry to reflect a “paid charge-off” status. This updated status, while still derogatory, may be viewed more favorably by some lenders.

Another common approach is to negotiate a settlement for less than the full amount. This negotiation can occur with the original creditor or, more commonly, with the third-party debt buyer. Debt buyers, having acquired the debt at a reduced cost, may accept a lower lump-sum payment or a series of payments to close the account. This can resolve the debt for a lesser financial outlay than the full amount.

It is important to understand the tax implications of settled debt. If a creditor or debt buyer forgives $600 or more, they must issue Form 1099-C, Cancellation of Debt, to the consumer and the IRS. The cancelled debt, as reported on Form 1099-C, is generally considered taxable income by the IRS. Consumers may have to include this amount on their federal income tax return, and potentially state income tax returns if applicable. Exceptions, such as insolvency or bankruptcy, may apply, potentially allowing the consumer to exclude the cancelled debt from taxable income.