What Are Charge-Offs?

Charge-offs are when a creditor deems a debt to be “uncollectable” in order to be able to write it off in their accounting records. Different companies handle charge-offs in different ways – some have an internal collection department, while others will sell old debts or contract third parties to collect for them.

No matter which option a company chooses, charge-offs can be a real headache for consumers, not only because of the damage to their credit reports, but because of the collection activity that often occurs as a result.

Myth:

Charge-offs only occur after several months of no payment – and when they do, they are easy to correct.

Fact:

Charge-offs can occur as soon as 90 days past-due, though most companies wait six months. Regardless of when the charge-off occurs, getting it resolved can be difficult if the company sells their debts to a third-party collection agency.

Myth:

Charge-offs really aren’t that damaging to credit scores.

Fact:

Charge-offs are a significant negative when seen on your credit report, and are much more damaging than a 30-day or 60-day late notation. While not as bad as a bankruptcy or a foreclosure, most creditors won’t lend to someone who has multiple charge-offs on their credit report. Additionally, nearly all mortgage lenders require all charge-offs to be cleared before issuing a home loan.

Myth:

Since the company has written off the debt, I don’t have to pay my charge-offs.

Fact:

Even if your debts are now charge-offs, you are still liable for the debt and if the statute of limitations has not expired on collecting the debt, you may be sued for what you owe. Never assume that you don’t have to pay your charge-offs – always verify the facts.

Myth:

Since I only have one account, I can’t have multiple charge-offs listed for it.

Fact:

You can have one, two, three, or even more charge-offs listed for the same account. The reason being, debt collection companies often sell debt to other collection agencies as well – leaving a trail of charge-offs in their wake. Cleaning up these multiple negative listings can be a real hassle and your credit scores will drop for each new charge-off account listed on your report.

Myth:

Charge-offs are permanent – once you get one on your credit report, there is no getting it off.

Fact:

Despite the very definite negatives that come with charge-offs, there is still hope. These negative listings can be removed if they are inaccurate, just the same as any other debt. And like other debts, there is a credit reporting limit in effect – so if it’s after the credit reporting limit (generally 7 years) then the charge-offs must be removed from your credit report.

Understanding Charge-offs and Your Credit

Once you understand the seriousness of charge-offs and how they affect your credit, you can take steps to avoid having them listed in the first place. Here are three quick tips to avoid charge-offs on your credit file:

1. Keep all accounts as current as possible. If you can’t pay up in full each month, try to come to an arrangement with the creditor. The goal here is to never be more than 60 days past due on any debt. That way, you are assured of avoiding a charge-off.
2. Pay attention to any “Final Notice” bills that you receive. Go to the original creditor and try to work something out before the debt is sold to a collection agency. You’ll find that most creditors are willing to work with you because they get more money if they don’t hire out an agency.
3. Get professional help. If you are having problems with your credit, a credit repair specialist may be able to help you avoid the pitfalls of charge-offs and improve your credit scores at the same time. Disputing inaccurate information (such as debts listed as past-due when they’ve been paid) can help to keep your account from going so far into arrears that the debt is charged-off.

No matter what you decide to do to get rid of or prevent charge-offs, there is no better time to act than right now. Charge-offs don’t have to ruin your financial future if you are smart and take the time to be proactive about repairing your credit.

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.

Scenario 2: Stacy has fallen behind on some of her bills over the years, including some charge-offs. She gets a raise at her job, and starts paying off all of her bills, starting with the oldest ones first. Stacy is dismayed to find out that her credit scores have dropped significantly, despite the new ‘paid’ status on all of her old, previously-unpaid accounts. She is unable to open any new credit accounts, and despite having paid down her debts, she finds that her credit scores remain low for some time.

Both Brenda and Stacy paid their debts, so why did Brenda’s credit scores improve while Stacy’s got worse? The simple answer is: Time. Brenda’s debts were only a few months past-due, while Stacy’s debt was years past due. Because new negative information harms your credit scores, paying off a lot of old charge-offs can initially put your credit scores into a tailspin. Even though Brenda’s medical bill was written off after a few months, the relative newness of the negative information had already done its damage to her scores. Stacy’s old charge-offs, however, were impacting her credit scores much less before they were paid in full.

How late is too late to pay down a debt? Generally speaking, the closer a debt is to being dropped from your credit report, the less likely it is to help you if you pay it off now. That doesn’t mean you shouldn’t pay off the debt – but you may want to wait until the item has dropped from your credit report if you want to avoid damaging your credit scores. In general, any revolving debt that is a few months past due should be taken care of first. Open accounts take precedence over your old charge-offs.

If you do decide to pay on a charged-off account, make sure that you only pay the original creditor. While debt collectors may be the ones contacting you about the debt, not all debt collection agencies are reputable. If you pay off the original creditor, there is less chance that your good-faith payment will be mishandled. In some instances, very old debt may have been bought and sold by multiple debt collectors – paying the original creditor ensures that you have a verifiable means of proving that the debt has been satisfied.

Charge-offs can be tricky business. No one wants to leave a debt unpaid, but if a credit item is about to be removed from your credit report, it may be best to wait before you pay. If you do decide to pay sooner, contact the creditor directly and let them know that you’d like to work out an arrangement that will help minimize the impact to your credit scores. Make sure you check on your credit report again after the payment has cleared to be sure that it accurately reflects the status of the debt. The worst thing you can do is pay off a bill and have the payment go unreported, so always be vigilant and check your report regularly.

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.

Pay for deletion is not the same as a settlement agreement. When you pay off a settlement account, the account itself remains on your credit report, and will be listed as either ‘Paid in Full’ or ‘Settled’ depending upon whether or not you paid the full amount to the creditor or a partial payment. Having these settled accounts on your credit report can actually hurt you in some instances, as potential creditors may consider you a risk when it comes to repaying your debts in full. With pay for deletion, the record is removed from your credit report entirely – a potential creditor will not see the account, and it will not be a factor in your credit score.

Pay for deletion is most helpful for charge-off accounts that have been purchased by collection agencies, and other very old debts that have not been paid. By removing these debts from your credit history, you may be able to raise your credit score by several points. If you are using a credit repair agency, and they recommend a pay for deletion strategy, be certain that you have the agreement in writing before you pay – without the written agreement, you may find that the derogatory account remains on your credit report, even after you’ve paid.

It’s important to realize that pay for deletion is only a useful strategy when you have the money available to pay. Creditors will expect money in certified funds, such as a cashier’s check or money order, so having the funds on hand will help to expedite the process, should your creditor agree to the pay for deletion arrangement. Some creditors do not enter into these types of agreements, so it’s not a one-size fits all solution. However, even if the creditor does not agree, you or the credit repair agency may be able to negotiate other favorable terms in order to avoid having a ‘settled’ account on your credit report.

While pay for deletion is not always a viable option for everyone, it can help some individuals who have old debts that they can afford to pay off right away. Whether you are repairing your own credit, or relying on the services of a credit repair agency, get the pay for deletion agreement in writing, be ready to pay, and follow up to be sure that the account has been successfully deleted from your credit report after you’ve paid. As long as you pick accounts that are best suited to this type of agreement, you may be able to benefit from a tangible boost to your credit score.

Myth: Once a Debt is Charged-Off, I Don’t Have to Pay It

Charge-offs may seem like a positive at first, namely because the term sounds very similar to a “discharged” debt, which is one that has been cleared. Charged-off debts, despite the similar-sounding name, do not clear you of the obligation to pay the debt. Instead, it is an indication that the company does not believe you will pay the debt and therefore it has been removed from their accounts receivable. It essentially makes your debt an expense on the record books of the company, but that does not relieve you of responsibility. Charged-off debt classifies you as a ‘high-risk’ to many credit issuing companies, and can severely impact your ability to get future credit.

One Caveat: if the debt is past the time allowed by your state to collect, you don’t have to repay the debt, whether it’s been charged-off or not. Typically, the age of the debt has to be anywhere from 4-6 years before this is the case, but because these regulations vary by state, it’s best to check your local laws to be sure you’re in the clear.

Myth: Credit Repair Services Can Erase All Negative Credit Information, Even if it’s Legitimate

Reputable companies won’t promise to erase legitimate debts. Under the Fair Credit Reporting Act, you are allowed to challenge debts that you believe to be erroneous or questionable. That does not mean that you should challenge any and all debts. In fact, doing so may result in collection agencies and bill collectors ignoring any legitimate requests you may make to have truly erroneous information removed. This is because if the company feels that your dispute is ‘frivolous’ they can ignore it, and leave the debt on your credit report.

There are numerous ways to have negative items on your credit report removed. Disputing them is not the only way. If the debt is legitimate and being reported correctly, you may want to try to negotiate a pay for delete. When using this method, remember to always get the terms in writing.

Your best bet is to choose a credit repair service that has a reputation for success, and that uses ethical and legal methods to improve your credit score. You may not be able to get rid of all negative information, but the removal of even a few items could see your credit score improve dramatically.

Paying Off Old Debts Will Improve My Credit Score

Surprisingly, paying off old debts will not always improve your credit score, and may actually worsen it. This is because paying on an old debt can sometimes make the debt appear to be new. If the amount you owe is substantial, this can make it seem as though you’ve just taken on a lot of new debt. While the credit bureaus are working on finding ways to eliminate this setback, currently there is still a chance you could see your credit score fall as a result of old debts being paid. Be particularly vigilant when it comes to knowing when your debt’s statute of limitations for collections has run out – you don’t want to pay on a debt that is no longer enforceable by law unless there are very special circumstances.

Keeping the truth behind these three myths in mind can help you to avoid unnecessary declines in your credit score. If you need help improving your credit score, always deal with a reputable agency, and be sure to check the facts to be certain the law is on your side in your quest for better credit.

However, there is another type of “re-aged” debt. When your past-due bills are charged-off by the original creditor, they are oftentimes sold to collection agencies. These agencies pay mere pennies on the dollar to acquire these debts, and then attempt to collect and make a profit. Sometimes, unscrupulous collection agencies will “re-age” this newly purchased debt. This is a major problem for two reasons:

1. It makes the debt look like a new debt that is delinquent, rather than the same old debt, owned by a new creditor.
2. It gives the collection company additional time to attempt to collect the debt, even if the debt is too old to legally collect.

The additional delinquency will cause your credit score to take another hit, and the revised delinquency date gives the credit agency a longer time to pursue the debt. While this type of “re-aging” is illegal, there is no simple way for the average consumer to get immediate relief from this type of unfair practice. In order to dispute re-aged debt, the consumer has to carefully document the discrepancy and file a complaint with the FTC. If the collection agency states that the falsely re-aged debt is legitimate, you may be able to sue.

Unfortunately, if you’ve made a payment on one of these “re-aged” debts, it can be almost impossible to have the matter corrected, as the payment serves to renew the time that the debt remains on your credit report! This means a payment to a collection agency can leave you with a delinquent debt that cannot be removed for another 7 to 10 years if it is not paid off.

Unscrupulous practices like these are why it is so important to carefully monitor your credit report, and to avoid dealing with any collection agency that uses high-pressure, unfair tactics to try to get you to pay. Most importantly, if the debt in question is too old to collect based upon the laws of your state, do not offer to pay! It is in your best interests to state that the debt is past the statute of limitations for collections and to send a certified “cease and desist” letter to any agency attempting to collect. Don’t let “re-aged” debt ruin your credit score or your chances for good credit.

What most people don’t understand is that credit reporting is voluntary. Your creditors don’t have to report your accounts to the credit bureaus. In fact, they can even pick and choose which ones they report to! Your creditors can also delete a charge off that they have reported if they wanted to. In fact, before you ever agree to pay a charge off, you should ask for the creditor to delete the reported charge off in exchange for your payment. Always get it in writing.

The problem with the “pay for delete” theory is that most creditors and collection agencies will blatantly lie to you and say that once it’s been reported they can’t remove it. This is obviously a lie because thousands of charge offs get removed on a daily basis.

If you have already paid the charge off, perhaps you could send the creditor a good will letter or make a call and simply ask them to delete it for you. Chances are they won’t (because the employees are told they can’t) but, it’s worth a try.

Another way, and perhaps the most effective way, is to dispute the charge off with the credit bureaus. There are right ways to do it and wrong ways to do it. In fact, some of the wrong ways can basically ensure that it stays on for 7 years. That is why I recommend letting a credit repair service do it for you; because they know what they’re doing! However, for the do-it-yourselfer’s, I do teach people how to write credit repair letters at the forum. The biggest mistake you can make is just jumping into it. Do your homework, put in your time and repair your credit.