What Is a Charge-Off Account & What Should You Do?

A charge-off account represents a debt a creditor has deemed unlikely to be collected. This internal accounting classification means the creditor has written off the debt as a loss on their financial statements. While it indicates a significant delinquency, a charge-off does not eliminate the consumer’s obligation to repay the debt; it simply changes its status on the creditor’s books, reflecting reduced recoverability.

Understanding a Charge-Off

A charge-off occurs when a borrower fails to make payments on a debt for an extended period, leading the creditor to consider the amount uncollectible. Creditors classify an account as charged off after 120 to 180 days of continuous non-payment. This timeframe can vary; for instance, credit card accounts are often charged off after 180 days of delinquency, while installment loans might be charged off after 120 days.

This action is primarily an accounting adjustment for the creditor, removing the debt from their active receivables. It is recorded as a loss on their income statement. Despite this internal write-off, the debt remains legally owed by the consumer, and the creditor retains the right to pursue collection efforts.

The charge-off status indicates the highest level of delinquency an account can reach before further action is taken. It signifies a severe negative event in a consumer’s credit history.

Creditor Actions and Reporting

Once an account is charged off, the original creditor does not absolve the consumer of the debt. The creditor has several options for managing the charged-off debt, often leading to further collection attempts.

A charged-off account appears as a negative entry on a consumer’s credit report, significantly impacting their credit score. This derogatory mark can remain on the credit report for up to seven years from the date of the first missed payment that led to the delinquency. Even if the debt is later paid or settled, the charge-off itself will remain on the credit report for the full seven-year period, though its status may be updated to “paid” or “settled.”

The original creditor may attempt to collect the debt through their internal collections department. Alternatively, they often sell the charged-off debt to a third-party debt buyer or assign it to a collection agency. The consumer will then deal with the new entity, and the debt may appear twice on the credit report: once from the original creditor and again from the collection agency.

Options for Consumers

When faced with a charged-off account, consumers have several pathways to address the debt and mitigate its impact. One approach involves paying the full outstanding amount. While this resolves the debt and can show a “paid” status, the charge-off entry remains visible for the statutory seven-year period.

Another common strategy is negotiating a settlement with the creditor or debt collector. This often involves offering a lump sum for less than the total amount owed, typically ranging from 30% to 50% of the original debt. If a lump sum is not feasible, some creditors may agree to a payment arrangement. Obtain any settlement agreement in writing before making a payment to ensure clear terms and accurate account status updates.

Consumers can also dispute the debt if they believe the information is inaccurate or invalid. The Fair Credit Reporting Act (FCRA) grants consumers the right to dispute incorrect information on their credit reports. Credit bureaus must investigate such disputes within 30 to 45 days. If the information cannot be verified, it should be removed.

For overwhelming debt, bankruptcy may be a consideration. Both Chapter 7 and Chapter 13 bankruptcy can address charged-off debts. When filing, include all charged-off balances in the bankruptcy petition. A bankruptcy filing can result in an automatic stay, temporarily stopping collection efforts, and may lead to debt discharge, though this has its own long-term credit implications.