- A charge-off occurs when a creditor believes you won’t repay your debt, then sells it to a collection agency that may continue collection efforts.
- If this status appears on your credit report, it could stay there for up to seven years, dragging down your credit score.
- The only ways to get rid of charged-off debt that’s legitimately yours are to pay it off, negotiate a settlement or attempt a bankruptcy discharge.
- Before moving forward on remedying a charge-off, confirm the debt belongs to you and whether you can be sued for it.
If you see the words “charged off as bad debt” on your credit report, it’s beneficial to take action sooner rather than later. This ominous phrase means that a creditor believes you won’t be repaying an outstanding balance even though you’re still legally obligated to do so. Acting swiftly can help confirm whether the debt and designation are legitimate, and to minimize the harm to your credit.
“Charged off accounts and collections on a credit report will have a negative impact on future borrowing and consumer activities, as well as the credit score,” says Becky House, a former credit counselor and current director of strategic initiatives at American Financial Solutions (AFS), a national nonprofit agency. “It is important to try and make a plan to pay off negative accounts that (you do) owe.”
This way, you can restore the economic reputation that your credit report broadcasts to other lenders.
Because time is of the essence, let’s get right into an expanded definition of “charged off as bad debt” and what to do if the funky phrase is thrown your way.
Inside this article
What is "charged off as bad debt?"
Also known simply as a charge off, it can happen 90 to 180 days after you’ve missed a payment—or haven’t met your minimum payment amount—toward an outstanding balance. Typically, your creditor will contact you multiple times before it charges off your account as bad debt.
When the debt is charged off, it’s typically “sold off” to a third-party collection agency for less than what you owe. (That makes it easier to negotiate a settlement, which we discuss below.)
“If it’s been a short time since the account was charged off, the consumer may be able to get the original creditor to take the debt back and pay them directly,” says House. “Otherwise, in order to pay the debt, the person will need to work with the collection agency who is collecting the debt.”
If you don’t know the name of the debt collector, contact your original creditor or lender to gather their contact information. While you’re at it, request a full accounting of the debt if you don’t already have your own records. By acting swiftly, you can get to the bottom of how the charge-off occurred, plus lessen the toll on your credit.
How a debt charge-off affects your credit
Like a missed payment or something more serious like a bankruptcy, a debt charge-off is a negative mark that can hurt your credit report and score.
In the case of charge-offs, the true impact depends on whether your original lender and debt collection agency report your status to one, two or all three major credit bureaus (Equifax, TransUnion and Experian). Your credit report for each bureau might note two charge-offs, one from the original credit and another from its contracted debt collection agency. Once it appears on the report, the charge-off status will stay there for up to seven years (from the date of your first missed payment).
For each charge-off notation, your associated credit score would likely suffer. Though your score might already be down in the dumps due to months of missed (or delinquent) payments.
Repaying a charged-off account could improve your credit score, but the mark will still remain on your credit report for that seven-year period. The only way to remove the charged-off status before the seven-year mark is to successfully dispute it as an error (more on that below).
How to handle "charged off as bad debt"
A charge-off often happens alongside a bankruptcy proceeding as an original creditor could logically determine that its debtor doesn’t have the means to make good on their balance. Other times, however, receiving a charge-off can come as a surprise. Perhaps a lender had your incorrect contact information so you didn’t receive their warnings, or maybe the charge-off is mistakenly saddling you with a debt account that doesn’t actually belong in your name.
No matter how a charge-off happens, it’s only possible to get rid of the debt in a few ways. They include:
Before you head down one of these avenues, however, it’s wise to take the following steps:
1. Confirm the debt is yours—and whether or not you can be sued for it
Request a debt validation letter from the collections agency. If you’ve received an incomplete version already, fire off a debt verification letter in response to collect all the details you need. You should be looking for information like how much you owe and when the debt was originally taken out. Also, ask for proof that the statute of limitations—the timespan after borrowing that you can be brought to court—hasn’t expired for the account. (If it has expired, you might only feel a moral obligation to repay the debt, not a legal one.)
2. Talk to experts
Whether you have the cash for a payoff, will attempt to negotiate a settlement or are considering bankruptcy, you should first get professional and objective help. Talking to a credit counselor at an accredited counseling agency is a good starting point. So is consulting with a debt reduction attorney, particularly if they specialize in settlements or bankruptcy proceedings. The more objective advice you can gather, the better off you’ll be in all dealings with your debt collector.
3. For settlements, make an offer and expect a counter
Once you have a good look at your budget and what you can afford to pay, you might propose a lump-sum amount or, alternatively, an affordable payment plan. Either way, the debt collection agency will likely turn down your initial offer, so don’t necessarily start the negotiation with your best, final offer. As needed, stand your ground when the voice on the other end of the line tries to persuade you to change your mind. Having a lawyer negotiate on your behalf is another option.
4. Request credit reporting privileges
Though it may be unlikely, it could be worth asking the debt collector whether it will change its reporting to the credit bureaus, perhaps to get the charged-off status removed from your credit report. You might negotiate for this “pay-for-delete” benefit if the collection agency is requesting a higher dollar figure than you initially offered.
5. Get everything in writing
Whether you agree to do a deal or not, creating a paper trail can protect you if things go awry down the road. It’s a good way to make sure the debt collector holds up their end of the bargain. Plus, if you end up filing for bankruptcy down the road, it could help prove that you did everything in your power to pay down the debt.
How do you dispute a charge-off on your credit report?
If you’ve confirmed with the debt collector that the charge-off is illegitimate or incorrect—perhaps it’s past the seven-year mark—you may still need to contact at least one of the three major credit bureaus to get your credit report corrected. You might start with Experian, for example, which allows you to dispute any errors on your credit report online, over the phone or via snail mail. The bureau says that if you successfully document the issue, it will also contact Equifax and TransUnion on your behalf to correct their records as well.
Can you be sued for charged-off bad debt?
Yes, a collections agency can sue you for charged-off debt, but only if the account hasn’t surpassed your home state’s statute of limitations. You can contact your state’s attorney general’s office to confirm this crucial timespan.
Do you have to pay taxes on a removed charge-off?
If you negotiate a settlement for a charged-off debt, you could be obligated to pay income taxes on any forgiven amount of $600 or more. In this case, the IRS will send you Form 1099-C. It would be wise to consult a tax specialist and account for your potential tax obligations into any settlement offer.