What Is a Charge-Off on a Credit Card?

A credit card charge-off is a financial term indicating a debt status rather than debt forgiveness. It means a creditor has determined an outstanding balance is unlikely to be collected and has removed it from their active accounts. This internal accounting adjustment signifies a debt has become severely delinquent from the lender’s perspective.

Understanding Charge-Offs

A charge-off occurs when a credit card issuer officially writes off a debt as a loss on their books. This is an internal accounting procedure, not an elimination of the debt itself. For a creditor, a charged-off account is considered an uncollectible asset for financial reporting purposes.

The typical timeline for a credit card account to be charged off is around 180 days of continuous non-payment. During this period, the account transitions from being merely delinquent to being formally classified as a loss. This classification allows the lender to meet accounting standards and regulatory requirements.

Lenders charge off accounts primarily for accounting and regulatory reasons. Under generally accepted accounting principles (GAAP), financial institutions must remove uncollectible debts from their active balance sheets. This process allows them to accurately represent their financial health. Additionally, charging off a debt enables the creditor to take a tax deduction for the loss under Internal Revenue Code Section 166, which permits deductions for business bad debts. This accounting adjustment does not, however, mean the consumer’s obligation to pay the debt has disappeared.

A charge-off represents a more severe stage than delinquency. While delinquency indicates missed payments, a charge-off signifies that the creditor has ceased internal collection efforts and has formally recognized the debt as a probable loss. The debt remains legally owed by the consumer, and the creditor or a third party can still pursue collection.

Consumer Status After Charge-Off

After a credit card account is charged off, the debt remains legally owed by the consumer. This means the original creditor, or any entity that subsequently acquires the debt, retains the right to pursue collection.

A charged-off account appears on a consumer’s credit report as a derogatory mark. This negative entry significantly impacts credit scores because payment history is a major factor in credit scoring models. The account will typically be labeled “Charged Off” or “Account Closed by Grantor” and remains on the credit report for seven years from the date of the initial delinquency that led to the charge-off, as stipulated by the Fair Credit Reporting Act.

Following a charge-off, collection efforts typically intensify. The original creditor may continue to attempt to collect the debt directly, or they may sell the debt to a third-party debt buyer. These debt buyers acquire charged-off accounts, often for a fraction of the original balance, and then pursue collection from the consumer. Consumers can expect contact from collection agencies or debt buyers through mail and phone calls.

Even after a debt has been charged off and potentially sold to a collector, the creditor or debt buyer may pursue legal action to recover the amount owed. This legal right is subject to the statute of limitations, which is a legal timeframe during which a lawsuit can be filed. While this period varies by state, typically ranging from three to ten years for credit card debt, the debt itself does not disappear even if the statute of limitations has expired.

Resolving a Charged-Off Account

One direct option is to pay the full outstanding balance to the original creditor or the debt buyer. When the full amount is paid, the account status on the credit report may update to “paid in full” or “paid as agreed,” indicating the debt has been satisfied.

Another common approach is negotiating a settlement for less than the full amount owed. Creditors or debt buyers may agree to accept a reduced sum, often a lump-sum payment or a structured payment plan, to resolve the debt. It is important to obtain any settlement agreement in writing before making a payment to ensure all terms are clear and the agreement is binding. Settlement offers can vary, with original creditors often seeking 50% to 75% of the balance, while debt buyers might accept lower percentages, sometimes between 10% and 40%, especially for older debts.

The method of resolution affects how the account is reflected on the credit report. If a settlement is reached for less than the full balance, the credit report typically shows the account as “settled for less than full balance” or “paid charge-off.” While resolving the debt is beneficial, the original charge-off entry will remain on the credit report for the full seven-year period from the date of initial delinquency.

In some cases, if a significant portion of the debt is forgiven through settlement, the consumer might receive an IRS Form 1099-C, Cancellation of Debt, from the creditor or debt collector. This form is issued when $600 or more of debt is canceled, and the forgiven amount is generally considered taxable income by the Internal Revenue Service (IRS). While the statute of limitations dictates the period during which a creditor can sue to collect a debt, typically ranging from three to ten years, it does not extinguish the debt itself. Even if the legal timeframe for a lawsuit has passed, the debt remains owed, and collection attempts may continue, although legal action becomes less likely.