What Happens If Your Credit Card Is Charged Off?
What happens when your credit card is charged off? Understand the financial and credit implications, and find actionable ways to resolve the debt.
A credit card account becomes “charged off” when a creditor determines the debt is unlikely to be collected. This accounting action typically occurs after a prolonged period of non-payment, often around 180 days past the due date. For consumers, a charge-off signals a significant financial event that can have lasting consequences. This article explains what happens when a credit card is charged off and outlines steps you can take to address the situation.
Understanding a Charged-Off Account
A credit card charge-off represents an internal accounting classification by the creditor, signaling that the debt is deemed uncollectible. This action does not mean the debt is forgiven or erased; rather, it is moved from the creditor’s active accounts receivable to a loss category. Creditors typically charge off an account after it has been delinquent for approximately six months, or 180 days.
Creditors primarily charge off debt to remove it from their balance sheet as an asset no longer expected to generate revenue. This allows the creditor to reflect their financial health and can provide tax benefits, as uncollected debt can be written off as a business loss. While the creditor writes off the debt internally, they retain the legal right to collect the amount owed.
Immediate Impact on Your Finances
When a credit card account is charged off, an immediate and damaging effect is a significant drop in your credit score. Both FICO and VantageScore models heavily penalize accounts that go into default, and a charge-off is considered a severe negative mark. This adverse event can reduce your score by dozens, or even over a hundred points, depending on your credit history before the charge-off.
The creditor will typically close the charged-off account, meaning you can no longer use the credit card for new purchases or cash advances. This closure is permanent and eliminates any available credit limit. The original creditor will intensify collection efforts.
You may receive frequent calls, letters, and emails from the creditor’s internal collections department, urging you to pay the outstanding balance. These attempts aim to recover the debt before the creditor sells it to a third party. Ignoring these communications can lead to further complications.
Long-Term Credit and Financial Effects
A charged-off account remains on your credit report for seven years from the date of original delinquency. This negative mark significantly impairs your ability to obtain new credit. Lenders view charged-off accounts as high risk, making it challenging to qualify for loans, credit cards, mortgages, or even rental agreements.
The original creditor often sells the charged-off debt to a third-party debt buyer or collection agency. When sold, the new owner gains the right to collect the full outstanding balance. These debt buyers begin their own collection efforts, which can include persistent communication and, in some cases, legal action.
A debt buyer or original creditor may file a lawsuit to recover the outstanding debt, especially if the balance is substantial. If they obtain a judgment, they could garnish wages, levy bank accounts, or place liens on property, depending on state laws. Even if a debt is charged off, the legal obligation to repay it remains.
If a creditor or debt collector cancels or forgives a portion of your debt, you might receive a Form 1099-C, Cancellation of Debt. The amount canceled or forgiven, if it exceeds $600, is generally considered taxable income by the Internal Revenue Service (IRS), unless you qualify for exclusions or exceptions, such as insolvency.
Addressing a Charged-Off Debt
Addressing a charged-off debt is a step toward financial recovery and credit repair. Options for resolution include paying the debt in full or negotiating a settlement. Paying the full balance updates the account status on your credit report to “paid charge-off,” which looks more favorable to future creditors than an unpaid one. The charge-off remains for seven years.
Negotiating a settlement involves offering to pay a portion of the debt (often 30-70% of the original balance) in exchange for the creditor or debt collector considering it paid in full. This option can be more feasible than paying the entire amount, especially for larger debts. Negotiate these terms carefully and ensure they are mutually agreeable.
When communicating with a debt collector or original creditor, always request written validation of the debt to confirm the amount owed and their legal right to collect it. All agreements, especially for settlement or payment plans, should be obtained in writing before any payments. This documentation protects you by outlining the terms of the agreement and preventing future disputes.
Once the debt is resolved, whether by paying in full or settling, the account status on your credit report updates. While the charge-off still appears for seven years from the date of first delinquency, a “paid” or “settled” status is viewed more positively than an “unpaid” one. After resolving the charged-off debt, rebuild your credit by demonstrating responsible financial behavior, such as using secured credit cards, making on-time payments, and maintaining low credit utilization.