A charge-off is a term used in the financial and credit industry to indicate that a creditor has deemed a debt as unlikely to be collected. This typically happens when a borrower fails to make payments on a credit account for an extended period, usually 180 days (or six months) for credit card debt. Once an account is charged off, it does not mean the debt disappears. Instead, it is categorized as a loss for the original creditor, and they may take further action to collect the outstanding amount.
What Happens When a Debt Is Charged Off?
- Account Closed by Creditor: The creditor closes the account and reports it as a charge-off to credit bureaus.
- Credit Score Impact: A charge-off has a severe negative impact on the borrower’s credit score and can remain on the credit report for up to seven years from the date of delinquency.
- Collection Efforts Continue: The creditor or a collection agency may still attempt to collect the debt.
Can a Debt Be Sold After a Charge-Off?
Yes, a charged-off debt can be sold to a debt buyer or transferred to a third-party collection agency. Many creditors sell charged-off accounts to debt buyers at a fraction of the original amount. The debt buyer then assumes the right to collect the full amount from the debtor. Here’s what happens next:
- Debt Buyer Takes Over Collection Efforts: Once a debt is sold, the new owner (debt buyer) may attempt to collect, sometimes using aggressive tactics.
- Potential for Lawsuits: Some debt buyers file lawsuits to recover the amount owed.
- Negotiation and Settlement: Consumers can often negotiate with debt buyers to settle the debt for a reduced amount.
What Should You Do If You Have a Charged-Off Debt?
If you find a charge-off on your credit report or are contacted by a debt buyer, consider the following steps:
- Verify the Debt: Request written validation from the creditor or debt buyer.
- Know Your Rights: The Fair Debt Collection Practices Act (FDCPA) protects consumers from unfair collection practices.
- Negotiate a Settlement: In some cases, negotiating a lower payoff amount may be possible.
- Seek Legal Assistance: If you’re facing harassment or an unjust claim, consulting with a consumer protection attorney can help protect your rights.
Final Thoughts
A charge-off is not the end of the road—it simply means the original creditor has given up on collecting, but the debt itself still exists. Understanding your rights and options can help you handle the situation wisely, minimize damage to your credit, and potentially resolve the debt on more favorable terms.