My credit report shows a debt I owe got “charged off”… now what?

Congratulations! You ordered a copy of your credit report. What’s that… you found a “charge off”? I bet you’re wondering what the heck that even means!

Well, it means that the original creditor has given up on the hope that you wall pay your past due balance. But, the debt is NOT gone. You still owe the money… you just have to figure out to whom!

Having a debt charged off negatively affects your creditworthiness and may put you at risk for being sued by a collections company.

Here’s what you really need to know about how to handle a charge off.

1. The debt is not gone.

The term “charge off” is from the accounting world. All it means is that the original creditor, like a bank or a credit card company, has deemed your debt uncollectible BY THEM. The “charge off” is how they take the money you owe off their official balance sheet for accounting and tax purposes. Typically, this happens after you’ve been 180 days late on your payments. However, you still owe that money – to somebody…

2. A charged off debt may be sold.

Once a debt is charged off, the creditor will alert the credit reporting agencies (bad news for your credit score) and sometimes hire a collection company to collect the debt for them. More likely, they will sell the debt to an outside collection company for pennies on the dollar. The original creditor is no longer charging you late fees or interest, but the collection agency will probably tack on fees of their own.

3. The collections company has YEARS to chase after you.

Bad things happen to good people. Whether you lost your job, had an illness in the family, or just made a choice you now regret, the debts you accumulate are your responsibility. Once a charge off goes to collection, you have a few choices on how to handle the situation.

You could wait out the 5 -7 YEARS that the collection agency is legally allowed to try to collect. You may escape paying the debt, but the costs are high – seven years of terrible credit preventing you from making any big purchases requiring financing, trouble getting someone to hire you for a better job, even trouble signing a lease for a new apartment.

The statute of limitations for collection agencies varies by state, but federal law says that charge off will tank your credit score for seven years. And, don’t be surprised if the collection company sues you for the debt. A legal judgment against you can result in garnished wages or liens on your personal property.

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4. The best way to handle a charge off is to pay the debt.

First, contact the original creditor to see if you can pay them directly or make new payment arrangements. It’s often a long shot, but you may be able to get them to reverse the charge off and update your credit report to “paying as agreed”. If this is the case, break out the happy dance!

More likely, you’ll work with the collection company to negotiate a payment plan. Effectively communicating with a collection company is a whole different mess. Do your homework first. Check out the company with the Better Business Bureau, determine the exact date you last made a payment to set the statute of limitations (especially  if the collector is already threatening to sue), and verify the amount of the original debt.

If you cannot pay the debt off all at once, and cannot make payment arrangements with the original creditor, you’ll be making payments to the collections company. Make sure you get the terms of your repayment in writing. Once you make your first payment, request (in writing) that the collections company updates your status with the credit reporting agencies to “paying, charge-off”. While not as good as a “paying as agreed” notation, it will still show to prospective creditors that you are doing everything you can to make good on what you owe. Once the balance is paid off, you can request a “paid as agreed” status update.

5. Don’t be a victim of questionable collections practices.

Don’t let the collections company push you around, either. Collections agents work on commission. The bigger the payment you make, the bigger their paycheck. Never agree to make payments you know you can’t really afford. You’ll be headed down a slippery slope into very deep trouble. If you believe you are being bullied or harassed, contact a consumer defense attorney for advice. Many offer free consultations.

If there are any doubts that the debt is actually yours, or you suspect the debt is outside of its statute of limitations, request the collector to verify the debt in writing. According to very specific guidelines established by the Fair Debt Collection Practices Act they have 30 days to do so before rendering the debt uncollectable. If they can’t (or won’t) validate it, they can’t collect it. They can never call you about it again or sue you either, unless THEY want to be sued for violating the FDCPA.

Charge offs are bad, but not the end of the world. Gather the facts, keep the conversation in your terms, and don’t be afraid to ask for help. Please contact us if we can be of service.

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Other articles that may interest you:
3 Instant Credit Score Fixes
Keeping the Wolves at Bay – Safely Communicating With Debt Collectors
7 Ways to Improve Your Credit

This information is intended for informational and educational purposes only and not as legal advice. If you have concerns about your credit report, harassment, identity theft, illegal collections activity, garnishments, or property liens, you should consult a attorney who specializes in consumer rights and defense.

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