You are late on a credit card. Months late. The bank which issued you the credit card is calling you every couple of days and sending you notice after notice in the mail to get you to send in a payment. But you can’t. Maybe you got laid off or lost your job. Or you have lots of other bills and you cannot afford to pay this bill.
After six months of no payments, the credit card issuer has to “clean up its books”. So it performs an accounting function and “charges off” your debt. The assumption is that, after six months of no payments, you are probably not going to pay this debt. So this loan needs to be removed from the bank’s assets. This is a charge off.
Charge off definitely does not mean that your debt has been wiped out, forgiven and no longer exists. To the contrary, it means your financial life is about to get worse.
Once the credit card issuer charges off your debt, it most likely will be transferred to a collection agency. It does not matter if the bank transferred the debt to the collection agency or sold it to the collection agency. In either case the collection agency is now in charge of your debt. Calling the bank to work something out is now a moot point. You no longer exist in the bank’s view!
The debt collector has to work within the law; the Fair Debt Collection Practices Act. The debt collector is allowed to call you and write you to collect the debt. After all, you still owe it! You can tell the collector to stop calling and stop writing. But that does not mean the collection agency is not working behind the scenes to determine if you have a paycheck or assets to go after. Your charged off debt is always valid to purse until you pay it off.
Your credit report has already taken a hit. Your credit score dropped at 30 days late, 60 days, 90 days and 120 days. Once you reach the 180 day mark and your debt is charged off, the debt becomes reported as “Charged Off.” This notation remains on your credit report for seven years from the first missed payment’s due date.
According to MyFICO.com, approximately 35% of a credit score is based upon payment history. So having a charge off appear on our credit reports has a major impact on our credit score for years and years!
If you do pay off a charged off debt, your credit report will show “Charged Off – Paid”. Obviously this looks better than just showing as charged off. But this still remains on your credit report for seven years from the first delinquency.
I hope this clears up the confusion out there about what a charged off debt is. It is not forgiven. It is still a valid debt. It can be collected. And it will impact your credit score for many years. “Charge Off” is not a pleasant phrase!