What Happens When Your Credit Card Debt Is Charged Off?
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It's the dream of everyone who has struggled with credit card debt to see their balances magically disappear. It's even tempting to imagine that your credit card issuer will simply grow tired of pursuing you and give up, so that you don't have to pay off your debt at all. This can be the impression that some people have when they hear that their credit card debt may be "charged off," but unfortunately the notion that their debt has somehow disappeared is a mistake.
What Is a Charge Off?
A charge off is an accounting term used by creditors to classify a debt that is no longer on their balance sheet. For example, a credit card issuer may consider the money to be owed to them up until it is 180 days past due, but then charge off the debt. This means that their balance sheet no longer shows the money being owed, but the cardholder still has a legal obligation to repay the debt. A charge off is simply an accounting term that doesn't reflect the borrower's obligation to repay the debt.
What Happens When Your Account Is Charged Off?
After an account has been considered charged off, the credit card issuer will still attempt to collect it. The company will likely hire a collections agency, which is a firm that specializes in this process. You can certainly expect a collections agency to make every attempt to contact you, including writing letters and making phone calls, on behalf of the issuer. The issuer may also simply sell your debt to the collections agency, meaning that you are now obligated to pay the agency, not the credit card issuer.
But most importantly, having a credit card or any other debt charged off will do great damage to your credit score. In most cases, a lender won't charge off a debt until it is 180 days past due. By that time, you will have incurred months of late payment notices on your credit report. Because payment history makes up 35% of a credit score, your credit score will have suffered tremendously by the time the lender makes the charge off official.
If the debt has been sold, the collections agency will then report this balance as a new debt to the consumer credit bureaus, and the late payment reports can begin all over again, further eroding your credit.
It's also likely that the credit card issuer will not want to do business with you for some time, perhaps even when your credit has improved and other issuers are willing to grant you an account.
Having bad credit will greatly diminish the opportunity to obtain credit in the future. You may need to build your credit score back with secured credit cards or pay higher fees for credit cards offered to those with bad credit.
What Should You Do When Your Account Is Charged Off?
By far, the best strategy is to avoid charge offs altogether. If you are unable to make a payment, you should contact your credit card issuer as soon as possible and do your best to work out a payment plan. It can also help to contact a nonprofit credit counseling service for assistance.
Once your account has been charged off, you should still make every effort to repay your debt. This will prevent additional negative information from appearing in your credit history. And when you finally repay your debt, it will appear as paid in your credit history, which will look much better than a charged off debt that remains unpaid. After you’ve resolved the debt, you will need to work on rebuilding your credit. Having a negative credit history can affect you in many ways, such as renting an apartment or even getting a job.
Have you ever had an account charged off? How'd you recover?
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Interesting topic. You mention collection agencies will report charged-off debt as new debt. Would that mean that the debt could potentially show on your report for longer than the seven years it's supposed to? (I hope I never have to find out)
The charge-offs with the original creditor are clearly listed as such. The collections agency, if you don't pay them, can also report a delinquency, so that would be a second derogatory remark. Both are removed at their own respective 7 year mark.
After charge-off, you can settle the balance at less than 50% and they stop trying to collect. Or you can wait out the phone calls until the statute of limitations is up (look up what it is in your state). It falls off your credit report in 7 years. It does lower your credit rating of course, but not as much as bankruptcy. It's perfectly legal, and part of contract law. The creditors know this might happen (this is the entire reason they charge interest) -- and they take a tax write-off. Within two years, you will be offered credit cards again.
I survived four charge-offs in the great recession of 2009. Settled on 3 of them. By 2013 my income went up and I was inundated with credit card offers at 0% intro rates and today all have fallen off my credit report. There are far worse things to recover from.