What Does Charged Off as Bad Credit Mean?
Gain clarity on charged-off accounts. Discover what this financial status signifies for your credit health and future financial standing.
“Charged off as bad credit” refers to a financial event that occurs when a creditor determines a debt is unlikely to be collected.
Understanding a Charged-Off Account
A charge-off is an internal accounting classification used by creditors to signify a debt they no longer expect to collect. This typically occurs after a prolonged period of non-payment, often around 120 to 180 days past the due date for credit cards and other revolving accounts. While the account is written off as a loss on the creditor’s books, the debt itself is not forgiven.
From an accounting perspective, a charge-off means the creditor removes the uncollectible amount from its active accounts receivable, treating it as an expense or loss. This helps the creditor maintain accurate financial statements. The creditor’s decision to charge off an account does not absolve the debtor of responsibility; it indicates that the original lender has exhausted its typical collection efforts. The account is usually closed to further charges once it reaches this status.
Credit Report Impact
A charged-off account is considered a severely negative mark on an individual’s credit report. This derogatory entry significantly impacts credit scores. Payment history is a primary factor in credit scoring models, and a charge-off indicates a prolonged failure to meet financial obligations.
A charge-off typically remains on credit reports for up to seven years from the date of the original delinquency, which is usually the first missed payment that led to the charge-off. Even if the debt is eventually paid, the negative information continues to affect credit scores for a considerable period. The presence of a charge-off can signal to potential lenders a higher risk of default.
If the charged-off debt is sold to a collection agency, it may appear twice on a credit report: once from the original creditor and again as a collection account. This dual reporting can compound the negative effect on credit scores. While paying a charged-off account can show an updated status on the credit report, the negative entry generally remains for the full seven-year period.
Post-Charge-Off Debt Management
Once a debt has been charged off, the original creditor may continue collection efforts or, more commonly, sell the debt to a third-party collection agency. These collection agencies often purchase debts for a fraction of their original value, then pursue the debtor for the full amount plus potential interest and fees.
Ignoring a charged-off debt does not eliminate the legal obligation to pay it. Collection agencies may pursue legal action, including lawsuits, to recover the balance. If a judgment is obtained, it can lead to wage garnishment or liens on assets.
One approach is to pay the full balance owed. While this does not remove the charge-off from the credit report, it updates the status to “paid,” which can be viewed more favorably by future lenders. Another option is to negotiate a settlement for less than the full amount. Collection agencies, having acquired the debt at a reduced cost, may be willing to accept a percentage of the original balance, often ranging from 30% to 50%. It is advisable to get any settlement agreement in writing.
When a debt is settled for less than the full amount, the forgiven portion of $600 or more is generally considered taxable income by the Internal Revenue Service (IRS). The creditor or collection agency is typically required to issue Form 1099-C, Cancellation of Debt, to the debtor and the IRS. Debtors may qualify for exclusions, such as insolvency, which can prevent the canceled debt from being taxable income, requiring specific IRS forms like Form 982.