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What is a Charge-off Debt?

If a credit card or loan payment stays in a state of delinquency for several months, it may incur a charge-off on your credit report. When a creditor has given up on collecting the debt, they mark it as bad debt and a loss for their company. A charge-off takes it off the balance sheet on the creditor’s side. Usually, a creditor will do this when the account becomes 90-180 days delinquent, as it is unlikely to be paid off soon. The status of the “charge-off” is then conveyed to all three primary credit bureaus, as the debt can no longer be counted as an asset on the lending company’s books.

When a debt is categorized as a charge-off, it is in no way erased. You still owe that debt. A lender can still pursue the debt until the state-specific statute of limitations has expired. And a collector may continue attempting to contact you via phone, mail, or email, even if they can no longer sue over it.

How Does a Charge-off Debt Reflect on Your Credit Report?

Because a charge-off is counted as “bad debt” (debt that is unlikely to be collected), it reflects unfavorably on your past payment history. Your payment history is calculated as 35 percent of your FICO credit score, so having the charge-off is not ideal.

Businesses that run credit checks, such as car dealerships, apartments, or even potential employers, may be cautious in doing business with someone with long-term, unpaid credit accounts reflected on their credit score. Unpaid charge-offs, like chapter 13 bankruptcy, can stay on your credit for up to 7 years.

If you decide to take care of the unpaid debt after it has become a charge-off, it may still reflect poorly on your credit score. Even if it is changed to a ‘paid’ charge-off, creditors you try to work with in the future may note it as a potential red flag.

Did You Get the Charge-off in Error?

Creditors, by law, have to explain the unpaid debt in detail and supply the explanation to you in what is known as a validation notice. Once you receive the validation notice, you should first verify that the loan they are trying to collect is actually your debt.

Common names or relatives that share the name being the victims of mistaken identity is nothing new. There very well could be an argument that you are not the intended recipient of the validation notice. If this is the case, notify the credit bureaus of your concern immediately via letter and contest the account made in error.

Another issue that occurs is that the debt has actually already been paid. Despite what you may have heard, accountants are only human. If you believe your debt has already been paid, report your concern to the credit bureau immediately.

Is the debt past the statute of limitations? Each state has its own legal limit for how long a creditor can pursue the debt. If you think the statute of limitations might have expired, you may want to pursue legal action.

How Can You Avoid Charge-offs?

It’s best to avoid a charge-off debt at all costs. Some of the ways to do so are:

  • Set up a payment plan with your creditor: They’d much prefer to receive some money from you than for your account to go delinquent. Most lending agencies will try to help you out with a payment plan.
  • Create a budget for yourself based on your recurring bills and personal goals: If possible, build up an emergency fund to subsist on in the case of emergency financial issues.
  • Work alongside a debt or budget expert: They can help you develop plans to keep you out of delinquent debt.
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Estate Planning Attorney Eric Ridley