If you’re struggling with past due debts, you’ve probably been threatened with your account being “charged off.” Creditors deliver the message in an ominous tone, implying that something terrible is about to happen. However, if you look online, some people herald a charge-off as cause for celebration.
Do you owe the debt after it’s been charged off? Does the creditor suddenly get more rights against you?
Here are the facts about charged-off debt.
What is Charged Off Debt?
A debt is charged off when the creditor determines it is unlikely to be paid back. In general, creditors are required to charge off a bad debt after it has been delinquent for 180 days. Once charged off, the debt is reported as a loss on the creditor’s financial statements.
A charge-off is not necessarily the end of the road for a debt, though – it simply means that it’s no longer an active account on the creditor’s books. The creditor is still legally allowed to pursue collection, file a lawsuit for the balance due, and report the debt on your credit report.
What Happens When an Account is Charged Off
When a creditor charges off an account, it usually hires a collection agency to recoup the balance due. Alternatively, the creditor may decide to sell the debt to another company. Either way, you’ll start getting phone calls and collection letters from a new company attempting to collect from you.
Over time, your account may be transferred to new debt collectors or re-sold to other companies. This can make it challenging to keep track of the company in charge of the account and often leads to borrowers ignoring the calls and letters altogether.
Can a Creditor Garnish Wages After Charge Off?
To begin a wage garnishment or put a lien on your property, a creditor must file a lawsuit and win the case against you. Though mortgage companies and vehicle lenders take a lien when they give you the loan, that’s not the case for credit card companies and other unsecured creditors.
The creditor can file a lawsuit as soon as the account is charged off, but that rarely happens immediately. What’s more likely is that the creditor will continue collection efforts against you.
The Impact of Charge-Offs on Your Credit
The charge-off will appear on your credit report. Depending on a variety of other factors, this may damage your credit score.
The damage caused by a charge-off depends on several factors, including your current credit score. For example, the charge-off will drag your credit score down if you have excellent credit aside from this account. On the other hand, if you already have terrible credit, there’s unlikely to be much of an incremental impact.
A charge-off will remain on your report for seven years from the last payment made on the account. Therefore, it will continue to negatively impact you during this time.
Tax Consequences of Charge-Offs
When a lender charges off a debt, it’s typically written off in their books as bad debt and removed from their accounts receivable totals. Though this has an impact on your credit report, a charge-off doesn’t have any effect on your taxes.
Generally speaking, the IRS may view outstanding debt forgiven or canceled by the lender as part of your taxable income. Because there’s no change in your liability when a debt is charged off, you usually have no tax consequence. If you receive a tax document from a creditor, provide it to your tax professional immediately so they can guide you appropriately.
Disputing a Charge-Off
Disputing inaccurate information on your credit report is essential to improving your credit score. Therefore, if the charged-off account is reporting incorrectly, you should correct any errors.
Begin by obtaining copies of your credit reports from all three major reporting agencies: Experian, Equifax, and TransUnion. Then, review each credit report for errors or inconsistencies, and dispute any inaccuracies.
How to Resolve Charged-Off Debt
Dealing with charged-off debt can be a complex and overwhelming process. Debt collectors may use aggressive tactics to get you to pay the balance, so take steps to protect yourself from illegal harassment and maximize your leverage. Make sure you recognize the account and understand your legal liability before paying the debt.
You may decide to negotiate to settle the debt, file for bankruptcy, or take no action at all. Among the factors to consider are:
- When the statute of limitations expires;
- The amount of money the creditor can expect to recover if they sue you for the balance and get a court judgment;
- Your potential tax liability if you settle the debt;
- The impact of settlement on your credit score; and
- Whether filing for bankruptcy would provide a more significant benefit than paying this debt.
Filing Bankruptcy With Charged-Off Debts
Many of my clients think there’s a difference in their bankruptcy options if their debts have been charged-off, but that’s not the case. Filing bankruptcy will be the same no matter what the status of your unsecured debt may be.
If you’re filing bankruptcy under Chapter 13, however, the fact that your debt has been charged-off and sold to a debt buyer may require extra vigilance. If a debt buyer files a Proof of Claim to get paid through your Chapter 13 Plan, they will need to provide proof that you owe the debt and that they are the proper people to get paid, and the balance is correct.
Debt buyers who file Proofs of Claims in Chapter 13 bankruptcy cases often don’t have this information at the ready, which means you may be able to object to them getting paid at all in your case.
As a bankruptcy lawyer, I know how overwhelming it can be to deal with charged-off debt and the constant threats from debt collectors. Finding reliable information about your rights is tough, and you know the wrong decision could have catastrophic consequences. I help my clients work through all their options before deciding because they deserve control over their lives.
It’s natural to be afraid of charged-off debt, but I encourage you to take the time to understand your options. Then, review your financial situation to deal with the charged-off debt and start rebuilding your finances.
ABOUT THE AUTHOR
Since I became a lawyer in 1995, I’ve represented people with problems involving student loans, consumer debts, mortgage foreclosures, collection abuse, and credit reports. Instead of gatekeeping my knowledge, I make as much of it available at no cost as possible on this site and my other social channels. I wrote every word on this site.
I’ve helped thousands of federal and private student loan borrowers lower their payments, negotiate settlements, get out of default and qualify for loan forgiveness programs. My practice includes defending student loan lawsuits filed by companies such as Navient and National Collegiate Student Loan Trust. In addition, I’ve represented thousands of individuals and families in Chapter 7 and Chapter 13 bankruptcy cases. I currently focus my law practice solely on student loan issues.
I played a central role in developing the Student Loan Law Workshop, where I helped to train over 350 lawyers on how to help people with student loan problems. I’ve spoken at events held by the National Association of Consumer Bankruptcy Attorneys, National Association of Consumer Advocates, and bar associations around the country. National news outlets regularly look to me for my insights on student loans and consumer debt issues.
I’m licensed to practice law in New York and California and advise federal student loan borrowers nationwide.