What is a Charge-Off?

A charge-off is the declaration by a creditor that an amount of debt is unlikely to be collected. This occurs when an individual becomes severely delinquent on a debt. As a matter of practice, creditors will make this declaration after six months without a single payment from the consumer. A charge-off does not mean the debt is non-existent.

How a Charge-Off Affects Credit Score

Charge-off appears as a consequence of delinquent payments, which will be listed in the credit report.

Charge-off accounts harm the credit score in the credit report. Just one charge off may lower the credit score by as much as 100 points or even more.

Once the account goes into charge-off status, it converts into a derogatory remark on the report. This remark remains on the credit report from the first date of delinquency until up to seven years.

How To Remove a Charged-off Account From Credit Report

In order to eliminate charge-off from a credit report it would normally require contacting the original creditor to negotiate the removal. The original creditor needs to be persuaded in exchange for a payment of the debt owed. Negotiation is more successful when a person has the necessary amount of money to pay off the debt. Although in some cases, the charge-off remains unchanged on the credit report even after it was paid.

Charge-off debt does not imply that the person does not have to repay the debt any longer. Later, the creditor might sell the debt that was charged-off to a third-party collection agency that would then try to pursue the consumer to pay the delinquent account. Effectively, the consumer now owes the debt until it is paid off, settled, released in a bankruptcy, or becomes too old due to the statute of limitations.

The statute of limitations is the period of time when a debt can be collected via legal court system. When the statute of limitations is over, the debt is then considered too old to be collected. The charge-off status can still remain on the credit report even after statute of limitations has passed. When such situation occurs, the consumer cannot be taken to court for the unpaid debt. As a matter of fact, the consumer can file a lawsuit against collection agency for bringing the consumer to court over a debt beyond statutory of limitation period. The consumer can also sue the collection agency if it attempts to collect an old debt when asked not to contact the consumer and does so anyway. The Fair Debt Collection Practices Act (FDCPA) protects the consumer in such cases.

On the contrary, when the charge-off status is removed from the debtor’s credit report, it does not necessarily mean that the statute of limitations is over. Statute of limitations can still apply even if after the period of seven years the charge-off was removed from the credit report. When such situation occurs, the debtor can still be brought to court for a judgment on his unpaid debt. The statute of limitations varies in every state, which could be from three to fifteen years, depending on the case.

How To Avoid a Charge-off

It is always recommended to avoid an account to go into charge-off status. In order to avoid such thing from happening, it is necessary to pay all of the existing account on time, never be neither late nor overdue with the payments, and maintain all of the accounts in good standing by paying off the account balances which will result into the recovery of the credit score.