This is where the problem typically comes in when you have a charge off, because it may be some time before collection attempts on the account begin again. When they do, it is also very likely that it will be a third-party collection agency that attempts to collect on the debt. Knowing when to pay a charge-off and when you should not pay a charge-off is important not only for your finances, but for keeping your credit score as high as possible.

When You Should Pay a Charge-Off

The Charge-off is Recent

If the charge-off is very new, you are likely to see a big dip in your credit scores – and the higher your score, the bigger the dip. While a charge-off may take 20 or 30 points from someone with a low score, for someone who has a higher credit score, a charge-off can cause the score to drop 100 points! This can mean the difference between qualifying with excellent rates and not qualifying at all for some types of loans, so if possible, make arrangements to pay the charge-off on the condition that it is removed from your credit file entirely. This is typically easier when the charge-off is new and you are dealing with the creditor’s in-house collection team.

You Have to Pay the Charge-off to Qualify for a Home Loan

It is fairly common practice in the mortgage industry to require that all outstanding debt be cleared before a loan can be approved. This includes late payments, judgments, liens and charge-off accounts as well. If the charge-off is very old, you may be able to negotiate a partial payment to get the debt settled, but always verify with the lender if a partial payment is enough to satisfy their lending requirements.

Pay the Charge-off if the Creditor Will Delete/Re-age It

Some creditors will delete a charge-off from your credit file if you make the payment in full. However, not all creditors will do this, and some will claim that it isn’t possible, though this is not the case. You may have more luck asking them to “re-age” the account, however. In this instance, it would reset the timer on the payments and essentially your pay-off would look like you settled the debt in a timely fashion.

As you can see, there are several scenarios where paying a charge-off is the best option, and they all hinge on the assumption that the charge-off is actually yours and you have verified the amount of the charge-off is correct. If you have not verified that the debt is actually yours and that the payment amount listed on the charge-off is accurate, you may be better off seeking professional assistance from a credit repair specialist before you commit to making a payment.

When You Should NOT Pay a Charge-off

There are also several instances when paying a charge-off is a bad idea. While the following is not an exhaustive list, if any of these scenarios apply to you, you should consider the avenues available to you to repair your credit before you pay a charge-off.

Your Charge-off Account is Listed for Multiple Companies

It is all too-common in the third-party collections business that debts are sold and re-sold with very little (if any) documentation. If you see the same charge-off account listed several times with several different collection agencies, it is worth it to have each agency verify the debt before proceeding further. Confirming who actually owns the debt will ensure that you don’t pay an unscrupulous debt collector who will take the money even if they no longer own the debt.

You Aren’t Sure You Owe the Amount Listed on the Charge-Off

Sometimes debt collectors try to tack on bogus fees and interest. Unless the agreement you signed with the original creditor stipulates that third-party collection agencies can add their own fees and interest, debt collection agencies cannot add their own fees. It is also possible that you paid off the debt, but due to an error in the system, your account was flagged as a charge-off. If you have any proof that the debt was paid,  you absolutely should not pay a charge-off.

However, even if you don’t have proof, having the debt verified may still work in your favor. A professional credit repair specialist will be able to advise you on the best course of action if you aren’t sure how to proceed.

The Charge-off is Past the Statute of Limitations

This last scenario will vary from state to state, as collection laws are different. However, if the charge-off is past the statute of limitations, you have a built-in defense against having a judgment brought against you fro non-payment. The catch is, you must go to court and defend yourself against any lawsuit brought by the collection agency.

Most collection agencies don’t bother filing a lawsuit if your debt is past the statute of limitations, so some people choose not to pay and instead let the charge-off drop from their credit file after the federal reporting period expires. This doesn’t help your credit scores in the short term, but it can save your finances if you are trying to pay down debts on currently open accounts.

Regardless of whether or not you choose to pay your charge-off, having the advice and experience of a trained credit repair specialist can help you to come to the right conclusion for your particular situation.

Collection Agencies Buy Charge Off Debt

When a debt is first charged off, you may have a “quiet” period where no collection attempts are made. For many consumers, this may seem like a moment of relief – no collection calls, no demand letters, no contact of any kind.

Unfortunately, behind the scenes, your creditors are working to recoup their losses. Many times, they do this by selling your charge off to a collection agency, who then takes up the task of getting you to pay.

Collection agencies do not have any prior business relationship with you, and their only motivation is to get you to pay – by any means necessary. Many collection agencies have been found in violation of the Fair Debt Collection Practices Act (FDCPA) due to these aggressive collection policies.

What this means for you is:

• More phone calls – debt collectors often call many times a day, especially if you don’t answer the phone

• More demand letters – some of these may include mysterious “fees” in addition to the original amount you owe

• More negative entries on your credit report – the collection agency will most likely ding your report for the same debt.

• More confusion as your original debt may be bought and sold many times, making it uncertain who you should pay

As we come out of a recent recession, the amount of revolving consumer credit has plummeted. Many of these consumer accounts have been closed and are likely in charge off status:

The Collection Agency May Not Own the Charge Off

In some cases, a collection agency may pull your credit report on the belief that you owe a particular debt – whether you have the same name as another debtor, lived at a similar address, or some other factor can trigger this pull. If the collection agency bought a charge off from your original creditor, they will also most likely pull your credit.

However, in some instances the debt in question may not be yours, or the charge off information is used by a different creditor to try to get you to pay on a legitimate debt that is actually owned by another company.

This happens often in the case of very old debt which has been sold multiple times – the collection agency will still have your information in their system even though they’ve sold the debt, and whether through error or greed, they attempt to collect on a debt they no longer own.

What You Can Do to Fight Your Charge Off

• Verify that the original creditor sold the debt – sometimes, the creditor will be willing to work with you to settle through their own in-house collection team. If you can get an agreement with the original creditor, you can dispute the collection agency’s entry and have it removed from your credit file.

• Get verification of the debt from the collection agency – once you get confirmation that the original creditor did sell the debt, contact the collection agency, in writing, to get verification of the debt. Sometimes, the collection agency will not have all the information necessary to verify the debt and the listing will be removed from your credit report. Also, they cannot contact you to collect a debt until the verification process is complete.

• Get everything in writing if you have to deal with the collection agency. Remember, they only paid pennies on the dollar to purchase this charge off, so you may be able to pay less than you owe in order to remove the charge off from your account. But you have to have it in writing if you want the collection agency to honor any agreement you reach with them.

• Make certain that there is only one collection agency listed for your charge off – multiple companies claiming to service the same charge off not only hurts your credit score, but it makes it difficult to know who you should pay – this is why you must always get verification of the debt before you send any money whatsoever.

One more important point to note – make sure that the collection agency does not attempt to re-age the debt. The collection account should list the same dates for the debt as the original creditor, and is subject to the same statute of limitations on the collection of the debt.

Collection agencies that attempt to make the debt appear more recent are violating the FDCPA and you can dispute the dates to have them corrected or the entry removed entirely.

The first thing to realize is that charge offs do not free you from the financial obligation to pay a debt. Though the collection calls from the original creditor will likely stop coming, and you won’t receive notices in the mail anymore, this is only the calm before the storm.

Charge offs actually indicate that the creditor is counting your debt as a “loss” for accounting purposes – and the creditor can and often will continue to try to collect on the debt via other means. Usually, by contracting with a collection agency, or using their own in-house collections team.

Why Charge Offs Hurt Your Credit Score

When charge offs appear on your credit report, they serve as a red flag to other potential lenders – even if most of your accounts are up-to-date and paid on time, a single charged off debt can cause you to be denied for multiple types of credit.

The most notable example of this is a mortgage. To qualify for any mortgage, you will most likely have to pay off any charge offs listed on your credit report. However, you may also find that you are turned down for store cards and credit cards as well.

Once your account is in charge off status, paying the charge off will only help your credit slightly – a paid charge off is certainly better than one that is unpaid, but in terms of your credit score, the lift is usually minimal. While you can negotiate to get the charge off removed in return for full payment, these types of requests are not always honored by the creditors.

Charge Offs in Recent Years

If you have charge offs on your credit report due to financial troubles, you aren’t alone. The downturn in the economy in the past several years has triggered an explosion of charge offs that have impacted credit scores across the board. As this graph shows, the number of charge offs for credit card debt and consumer loans has spiked and remains prevalent even now:

Preventing Charge Offs

Every company has different internal policies about when a debt will be considered charged off. However, a general rule of thumb is that a debt will be listed as a charge off after 180 consecutive days of non-payment. This means that for the majority of creditors, you will be hit with charge offs around the six-month mark.

Once this happens, there are only two ways to deal with the charged off account:

1. Settle with the original creditor (or the collection agency) to get the listing removed.
2. Wait for the reporting limit to expire, and the charge-off to drop from your credit report – in roughly 7 years.

To prevent charge offs, you have several options:

1. Make your minimum payments. This is the simplest solution, if you have the funds available. You don’t need to pay off the entire amount of your debts, so long as you can meet the minimum payments necessary.
2.  Work out a payment agreement. If you just can’t afford to pay the minimums right now, you may be able to get your creditor to agree to a temporary halt in collection activity if you make a good faith effort to come to an agreement.
3.  Take action to catch up on debts that are 4 or 5 months behind. In some cases, it doesn’t have to be the full amount that you owe at that point. Making a payment in good faith may prevent your creditor from turning over the account to collections.

Charge Offs and Statute of Limitations for Debt Collection

It’s important to remember that the statute of limitations (SOL) for how long a creditor has to sue for a debt is not the same as the time that a listing can remain on your credit report. It is very common for debt to be time-barred to an actual lawsuit, but still legally reportable on your credit report – thereby damaging your credit scores.

Further complicating matters is the fact that the SOL varies from state to state, and some creditors enforce the SOL in various ways. For instance, some creditors will apply the laws of your state of your current residence to determine whether or not the debt is time-barred.

Other creditors will use the SOL of the state where you lived when you first took out the loan or credit card. Still others will use the SOL of the state where the business is located – so it’s important to know which location will be used for the SOL if you decide to “wait it out” for your charge offs.

In Part 2 of our discussion about charge offs, we’ll talk about what to do when charge offs are purchased by an outside collection agency, and how you can protect yourself from the negative impact of account re-aging and other collection company tactics.

1. Charge-offs

While at first glance charge-offs may look like you no longer owe creditor, in reality the creditor has deemed your debt to be a “lost cause” and has written off the debt or sold it to a debt collector. Typically, this only happens after several missed payments — anywhere from 3 to 6 months of nonpayment could land you with charge-off on your credit report.

Charge-offs are particularly damaging because they indicate that you are either unable or unwilling to pay off a debt, and are unwilling to work with creditors to find suitable payment arrangements. If your debt is sold to a debt collector, they too may place a negative item on your credit report, resulting in two negatives for one unpaid bill.

2. Maxed Out Credit Limits

Even if you pay your bills on time and avoid charge-offs and debt collectors, maxing out your credit cards will make it difficult for you to obtain new credit in the future. Having a high debt-to-available-credit ratio can take several points off of your credit score. Additionally, many lenders hesitate to extend credit to someone who is already maxed out, even if you are current with all of your bills.

If your cards are at their limit or close to it, work on paying down the balance. You should carry a balance of less than 30% of your credit limit from month to month in order to keep your credit scores healthy.

3. Lack of Credit or “Thin” Credit

If you’ve closed your old, unused credit card accounts, you may find it more difficult to open new accounts in the future. Likewise, if you’ve never had credit, expect to have less favorable financing terms than someone who has already established his or her credit. Because credit scores rank you on your credit history, having little or no credit accounts can mean that you will get turned down for many forms of credit because you don’t have a payment history that creditors can use to gauge your risk.

If you need to establish or reestablish your credit, a secured credit card may be one way for you to build a positive payment history while still taking advantage of favorable credit terms. Keep in mind that student loan repayment can also count, so if you have student loans, paying them off can contribute to establishing a positive payment history as well.

There are no easy answers when it comes to obtaining the best credit score possible. If you are having problems with negative credit and low credit scores and you can’t resolve the issue on your own, the next step may be to seek help from a professional credit repair company. A reputable credit repair service can help you to evaluate remove listings on your credit report. Negative items that aren’t accurate can be disputed, which will significantly raise your credit scores if you are able to have them removed.

Your first and likely best option is to write your creditor and request a pay-for-deletion arrangement. In the letter, offer to pay a percentage of what you owe provided that the creditor agrees to remove the charge-off from your credit report. If the debt is fairly recent, you may need to offer the full amount as payment in order to get the creditor to agree. Not all creditors will agree to this type of arrangement, but if they do, be certain you have the pay-for-deletion agreement in writing before you send in your payment. You will have to use certified funds in this type of an arrangement, so be prepared take the extra step of purchasing a money order or cashier’s check. This option works best, because the derogatory credit history will be gone from your report as if it never existed.

Your second option is to arrange for the debt to be listed as ‘Paid in Full’ on the credit report, in exchange for payment. Just as with a pay-for-deletion agreement, you must be certain to get this in writing, especially if you work out a payment arrangement that is less than what you owe. The ‘Paid in Full’ listing will improve your credit score, but not as much as having the derogatory information removed entirely. What you do not want is a listing of ‘Settled’ on the account, as it indicates to other creditors that you do not fully meet your credit obligations.

Your last option, if you cannot work with your creditors in any other way, is to pay off the debt in full, with appropriate account numbers, reference numbers and any other necessary information included with the payment. Make copies of everything, and once the payment clears, you can dispute the listing on the credit report to have it updated as ‘Paid in Full’. Keep in mind that you must provide proof that the debt was entirely satisfied in order for this method to work, so you won’t be able to make a payment that is less than the full amount owed if you want this to be successful.

One final note: charge-offs remain on your credit report for up to 7 years. If the date for the charge-off to be removed from your credit report is close, you may wish to wait for it to be removed from your credit report entirely. This is true whether or not you ultimately decide to repay the debt, because repaying older debts can cause your credit scores to drop temporarily.

Getting your credit repaired can take some time if you have several charge-offs. Be patient, wait for the written agreement, and make the payments in certified funds in order to obtain the best results.

That’s great, but what exactly is a charge off?

A charge off is basically a bad debt. When a creditor is unable to collect on an account they write it off. Creditors usually write off bad debts after a certain amount of time (usually 180 days or so without payment) for tax reasons. Every year, corporations file a Profit And Loss Statement with the Internal Revenue Service. All of the year’s bad debts are added together as an item in the “Loss” section of the P & L Statement, and are deducted from the corporation’s tax return, much like other business expenses. To creditors, bad debts and even fraud are simply part of the cost of doing business.

Once it’s been charged off, do I still owe it?

Of course you do. The debt is still legally valid and the creditor can attempt to collect the full amount. Most creditors will sell or assign the account to a debt collector. So, here’s what happens: The original creditor reports the account as a charge off and the collector reports it as a collection account. So, now you have 2 negative accounts on your credit report.

Ok, so what if I pay it off?

Paying off a charge off will not remove it from your credit reports. It will simply be updated to a “paid charge-off,” which is slightly better, but still considered a seriously derogatory item and can still remain on your credit report for 7 years.

Yikes! So, how can I get charge offs removed?

Through creditor negotiations and credit bureau disputes, you may be able to improve the status of the charge off or completely remove it from your credit reports. In exchange for resolving the debt, your creditor may be willing to remove the account or report it as “paid in full.” In the event where a charge off is being inaccurately reported on your credit reports, you can dispute it directly with the credit bureaus.

Learn more about removing charge offs!

Delinquencies (30 – 180 days late) remain for 7 years from the date of the initial missed payment.

Collection accounts remain on your credit report for 7 years from the date of the initial missed payment that led to the collection (the original delinquency date). When a collection account is paid in full, it will be marked “paid collection” on the credit report.

Charged-off accounts remain for 7 years from the date of the initial missed payment that led to the charge off (the original delinquency date), even if payments are later made on the charged-off account.

Closed accounts are accounts that are no longer available for further use. Closed accounts may or may not have a zero balance. Closed accounts with delinquencies remain 7 years from the date they are reported closed, whether closed by the creditor or by the consumer. Positive closed accounts remain at least 10 years.

Lost credit card – If there are no delinquencies, credit cards that are reported lost will continue to be listed for 2 years from the date the card is reported lost. Delinquent payments that occurred before the card was lost are reported for seven years.

Bankruptcy – Chapters 7, 11, and 12 remain for 10 years from the filing date. Chapter 13 remains 7 years from the filing date. Accounts included in bankruptcy remain 7 years from the date they were reported as included in the bankruptcy.

Judgments (child support, civil & small claims) remain on your report for 7 years from the date the judgment is filed.

Tax Liens – (city, county, state, and federal) Unpaid tax liens remain 15 years from the filing date. Paid tax liens remain 7 years from the paid date of the lien.

Inquiries remain on your credit report for 2 years, with those in the last 6 months usually given the most consideration.

Positive Accounts remain indefinitely and paid positive accounts remain 10 years.