What Happens When Your Credit Card Gets Charged Off?

A credit card charge-off occurs when a creditor formally removes a debt from its active accounts, classifying it as a loss on its financial statements. This accounting action typically happens after an extended period of non-payment, around 180 days from the last payment due date. Despite this declaration by the creditor, a charge-off does not forgive the debt; the outstanding amount remains legally owed by the consumer. This internal bookkeeping adjustment allows the creditor to claim the uncollected amount as a loss, which can impact their tax liability.

Impact on Your Credit Profile

A credit card charge-off negatively impacts your credit profile, affecting both your credit report and credit score. Once an account is charged off, creditors often report this severe delinquency to the three major credit bureaus: Equifax, Experian, and TransUnion. This becomes a negative mark on your credit reports. The presence of a charge-off signals to future lenders that you failed to repay a debt as agreed, indicating a heightened risk.

This mark remains on your credit report for up to seven years from the date of the original delinquency. Even if the debt is eventually paid, the charge-off notation itself persists, although its impact may lessen over time, especially if it is reported as paid. The long-term presence of a charge-off can make it difficult to obtain new credit, secure favorable interest rates, or even rent an apartment.

The impact on your credit score is immediate and considerable. Credit scoring models heavily weigh payment history. A charge-off signifies a severe default, leading to a significant drop in your score. This reduction reflects the increased risk perceived by lenders and can severely limit your access to credit products.

Creditor Actions After Charge-Off

After a credit card account has been charged off, the original creditor still retains the right to pursue collection of the debt. While they may continue internal collection efforts, a common action is to sell the charged-off debt to a third-party debt buyer. Debt buyers purchase the debt for a fraction of its face value, transferring ownership and the right to collect to the new entity. The original creditor removes the debt from its books, and the debt buyer assumes responsibility for collection.

Once a debt buyer acquires the account, consumers can expect various collection activities. These often include frequent phone calls, sending letters, and other communications aimed at recovering the outstanding balance. Debt buyers and collection agencies are persistent in their efforts, as their profitability depends on collecting these acquired debts. It is important to document all communications and understand your rights under consumer protection laws during these interactions.

A significant action that original creditors or debt buyers may take is filing a lawsuit to obtain a judgment against the consumer for the unpaid debt. If a judgment is granted, it confirms the debt and can enable the creditor to pursue more aggressive collection methods. These methods may include wage garnishment, where a portion of your earnings is legally withheld by your employer and sent directly to the creditor, or bank levies, which involve freezing funds in your bank accounts to satisfy the debt. The ability to pursue these actions varies by jurisdiction, but a judgment provides a powerful tool for debt recovery.

Your Options for Resolution

Several options exist for resolving a charged-off credit card debt. One approach is to pay the debt in full. While the charge-off will remain on your credit report for up to seven years, paying it will result in the account being reported as “paid charge-off” or “paid collection.” This status is viewed more favorably by lenders than an unpaid charge-off, potentially aiding in future credit applications.

Another common strategy involves negotiating a settlement with the original creditor or the debt collector for less than the full amount owed. Debt collectors, having often purchased the debt for pennies on the dollar, may be willing to accept a reduced lump-sum payment. It is crucial to get any settlement agreement in writing before making a payment. Be aware that if a debt of $600 or more is forgiven, the forgiven amount may be considered taxable income by the Internal Revenue Service, and you might receive a Form 1099-C, Cancellation of Debt. However, there are exceptions, such as if you were insolvent at the time the debt was canceled.

For consumers struggling to manage charged-off debts, credit counseling agencies or non-profit organizations can provide assistance. These agencies offer guidance on budgeting, debt management plans, and negotiating with creditors. They can help you understand your financial situation and explore repayment options, potentially consolidating multiple debts into a more manageable payment schedule. Their expertise can be beneficial in navigating debt resolution.