What Happens When a Credit Card Is Charged Off?
Unpack the implications of a credit card charge-off. Understand its far-reaching consequences for your credit, finances, and legal standing.
A credit card charge-off occurs when a creditor determines an outstanding debt, such as a credit card balance, is unlikely to be collected. This accounting action typically follows a prolonged period of non-payment. While it signifies the creditor has written off the debt as a loss on their financial records, it does not erase the consumer’s obligation to repay.
Understanding a Credit Card Charge-Off
A credit card charge-off is an internal accounting declaration by a creditor, indicating a debt is considered uncollectible. Federal regulations require creditors to charge off revolving credit accounts, like credit cards, after 180 days of delinquency. If a consumer fails to make minimum payments for this period, the account will likely be charged off.
From the creditor’s perspective, charging off a debt allows them to remove the uncollectible amount from active accounts receivable, treating it as a loss for tax and financial reporting. Despite this adjustment, the debt remains legally valid and owed by the consumer. The creditor retains the right to pursue collection of the full balance.
Immediate Consequences of a Charge-Off
When a credit card account is charged off, the account is promptly closed, and all credit privileges are revoked, meaning the card can no longer be used for purchases. This closure results from the prolonged delinquency.
A charge-off also results in a negative entry on the consumer’s credit report. This derogatory mark typically remains on credit reports for up to seven years from the date of the first missed payment that led to the delinquency. While the original creditor may cease accruing interest and fees on the charged-off balance after the write-off, the presence of a charge-off can substantially lower credit scores and make it more difficult to obtain new credit or loans in the future.
Debt Collection After Charge-Off
After a credit card account is charged off, debt collection continues. The original creditor may maintain direct collection efforts, attempting to recover the outstanding balance. These efforts often include phone calls and letters.
It is common for original creditors to sell charged-off debts to third-party debt buyers or assign them to collection agencies. Debt buyers typically acquire these accounts for a fraction of the original amount owed, granting them the legal right to pursue the full debt, plus any applicable interest and fees. Consumers may then receive communications from these new entities, which will attempt to collect the debt through various means.
Financial and Legal Ramifications
If a creditor or debt collector cancels or settles a debt for less than the full amount owed, and the forgiven amount is $600 or more, they are required to issue a Form 1099-C, Cancellation of Debt, to the consumer and the Internal Revenue Service (IRS). The IRS considers canceled debt as taxable income, meaning the consumer may have to report it on their federal tax return. However, certain exclusions, such as insolvency or bankruptcy, may apply, as detailed in IRS Publication 4681.
A creditor or debt buyer can also initiate a lawsuit against the consumer to obtain a judgment for the outstanding debt. If a court rules in favor of the creditor, this judgment can lead to further collection actions. These actions may include wage garnishment, where a portion of the consumer’s earnings is legally withheld and paid directly to the creditor. Additionally, a judgment could lead to bank levies, allowing the creditor to freeze and seize funds from the consumer’s bank accounts, or the placement of a lien on property, giving the creditor a legal claim against assets like real estate.