What is a Charge Off?: Prevention and Recovery

The term “charge off” has a negative connotation to it, and with good reason. But what does it really mean? Does it spell financial disaster, or is it possible to recover with a good credit standing? How do you prevent a credit account from being charged off in the first place? This common term describes many people’s past due accounts, so it is important to understand exactly what we mean by it.

What is a charge off?

Any type of account on which you owe money, such as a credit card, an installment agreement or otherwise, may be labeled as a “charge off”. In essence, this categorization refers to an account that is long past due. The general terms that apply to loans that are not paid on time are:

Delinquent – An account is considered delinquent if a payment has not been made on time.

Default – An account usually is considered in default if it is 30 days past due. The term indicates that the borrower has not paid as required through the loan agreement, and it usually will be reported to the credit bureaus at this time.

Charge off – An account is charged off when the creditor deems it to be an uncollectible debt, or “bad debt”. Generally, this is when six months has passed since the date of the first missed payment.

This should indicate to you that a charge off is fairly serious. When a lender writes off your loan as a bad debt, your account no longer is listed as an asset to the company and instead becomes a “loss” that they are able to write off of the company tax return. The bad news for you is that they compensate for this loss by holding you responsible.


What will happen if my account is charged off?

Borrowers sometimes have the mistaken notion that a charge off must have something to do with a lender closing your account, thus preventing you from “charging” more. In actuality, however, most accounts will have been frozen to prevent further use prior to this time, and the charge off affects you in other ways instead.

If you have a credit card charge off, or a charge off of some other kind, your lender will report this status to the three credit bureaus -- Equifax, Experian, and TransUnion. On your credit reports, your account will be labeled as a charge off. The listing will include the amount of debt that you owe, as well as the dates that pertain to your account.

Having a charge off listed on your credit report is incredibly detrimental to your credit score. In fact, it is among the very worst of listings. Potential future creditors look to your report and score to decide whether or not they should risk lending to you, and such negative marks will substantially impair your creditworthiness.

It is important to keep in mind that the negative inclusion on your credit reports does not mean that you have been “punished” and therefore no longer are liable for your charged off account. On the contrary, you still are fully liable for payment (and will be until the statute of limitations in your state runs out), and your creditor might sue you for payment.

You also are likely to hear from debt collectors at this time, if you have not already. Creditors usually sell or assign their bad debts to collections agencies to try to collect upon. You can expect phone calls, letters, or even in-person visits to demand payment on your debt. Fortunately, there are laws in place to protect you against harassment and abuse from debt collectors, but they can be difficult to deal with nonetheless.

How can I prevent a charge off?

If you have fallen behind in loan payments and are at risk of having a charged off account, it certainly is better to prevent it as well as possible. Whether or not collections actions already are being taken against you, you should contact your creditor directly. Explain the situation and try to negotiate. People often are surprised at the willingness of creditors to work with them, but a creditor does not want to count you as a loss any more than you want to be one.

Find out how much the creditor will accept in payment to not charge off your account. If you can pay, great. If you cannot afford it, however, then do not agree to do so. Instead, find out if they are willing to set up a payment plan or to settle for a realistic lump sum.

No matter what, only agree to a situation that will work for you. Do not allow yourself to be pushed into a payment or payments that you cannot afford. This will make everything worse in the long run. If you are able to come to an agreement, then be sure to get everything in writing.

If your own attempts at working with your creditor to come up with a solution are not working, then you might consider working with a credit counselor. Your credit counselor can help you to evaluate your financial situation, and to come up with your best method of debt relief.


I already have a charge off. What can I do to fix the situation?

If your account has been charged off, then you probably are most concerned with credit. If you are able to pay off your account at this time, then you should do so. Your account’s listing on your credit report then will read “Paid Charge off”. Not ideal, but certainly better than it is now.

In order to improve your credit, you need (1) to take real action to repair your score by removing negative items and cleaning up your report, and (2) to responsibly work with small amounts of new credit to rebuild your score.

Beyond these measures, you can use the same tactics listed above for working with your creditor to make your debt more manageable. In addition to credit counseling, you also might want to consider debt settlement or a debt consolidation loan as other outside sources of debt relief.

Keep in mind that even if you are able to come to an agreement with your creditor successfully, or even are able to pay off your charged off account in full, the negative mark on your credit reports still can remain for up to seven years.

Conclusion

While having an account charge off certainly is something to avoid if at all possible, it also is not the end of the world. Accounts are charged off all the time, and people recover. Just prevent the charge off as much as possible, work with your creditor to come up with a plan, and be prepared to take action to rectify the situation should it rear its ugly head.