What Is a Charge-Off?
A charge-off is a debt, for example on a credit card, that is deemed unlikely to be collected by the creditor because the borrower has become substantially delinquent after a period of time. However, a charge-off does not mean a write-off of the debt entirely. Having a charge-off can mean serious repercussions on your credit history and future borrowing ability.
- A charge-off refers to debt that a company believes it will no longer collect as the borrower has become delinquent on payments.
- Charged-off debt does not mean that the consumer does not have to repay the debt anymore.
- After a lender has charged off a debt, it could sell the debt to a third-party collections agency that would attempt to collect on the delinquent account.
- A consumer owes the debt until it is paid off, settled, discharged in a bankruptcy proceeding, or in case of legal proceedings, becomes too old due to the statute of limitations.
How a Charge-Off Works
A charge-off usually occurs when the creditor has deemed an outstanding debt is uncollectible; this typically follows 180 days or six months of non-payment. In addition, debt payments that fall below the required minimum payment for the period will also be charged off if the debtor does not make up for the shortfall. The creditor crosses off the consumer’s debt as uncollectible and marks it on the consumer’s credit report as a charge-off.
The fallout for having a charge-off on your credit report includes a fall in credit score and difficulty in getting approved for credit or obtaining credit at a decent interest rate in the future.
Paying off or settling the overdue debt will not remove the charge-off status from the consumer’s credit report. Instead, the status will be changed to “charge-off paid” or "charge-off settled.” Either way, charge-offs remain on the credit report for seven years, and the affected party will either have to wait out the seven years or negotiate with the creditor to have it removed after paying off all the debt. In the latter case, if the inability to repay the debt on time was due to a temporary setback like job loss, the debtor could write to the lender detailing the issue with proof of a good payment history up to the time of the job loss.
The statute of limitations is the amount of time a debt can be collected through the legal court system. Once the statute of limitations has passed, the debt is deemed too old to be collected. In this case, the borrower cannot be brought to court for the unpaid debt. In fact, the debtor can countersue the collections agency that took them to court over a time-barred debt. A debtor can also sue if an agency attempting to collect on an old debt is asked not to contact the consumer again and does so anyway. Such actions are in violation of the Fair Debt Collection Practices Act (FDCPA).
On the other hand, the removal of a charge-off status from a consumer's credit report does not mean the statute of limitations has passed. If after seven years, the charge-off is deleted from the report, the statute of limitations may still be in effect. In this case, the consumer can still be taken to court for a judgment on their unpaid debt. Each state has its own statute of limitations on debt, which, depending on the type of debt, could be as low as three years or as high as 15 years.
Note that just because a debt has passed the statute of limitations on its payment does not mean that the consumer no longer owes. It just means that the creditor or debt collector will not be able to get a judgment in court for the payment of the old debt.
Creditors refer to uncollectible debt as bad debt. When a firm incurs a bad debt, it writes off the uncollectible amount as an expense on the income statement. For a debt to qualify as a business bad debt, it must be incurred as part of normal business operations. The debt can be associated with either another business or an individual. Bad debt charge-offs are more likely to occur when associated with unsecured forms of credit, such as credit card debts or signature loans.