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Sometimes you get into a financial hole. Maybe you missed several months of payments on your credit card. It’s possible you couldn’t pay a personal loan for a while. But suddenly it goes from being overdue to being charged off as bad debt. That happens when a lender writes off your debt as uncollectable and the company classifies your account as a loss.
Once you’ve missed six months of payments on an account, a lender can charge off your account and report it to the three main credit reporting agencies. Once they’ve reported your charge off to Experian, Equifax and TransUnion, the charge off will remain on your credit report for seven years. Your credit score will likely take a hit, which can affect whether you’ll qualify for a mortgage, auto loan or other lines of credit.
Here’s a guide to help you understand what it means if your debt is charged off, and how you can pay off those debts to begin repairing your credit.
What does it mean if your debt is charged off as bad debt?
Just because a lender has charged off your debt doesn’t mean the debt goes away. You’re still responsible to pay off charges and loans to the original creditor or collection agency.
A collector will usually charge off an outstanding bill as bad debt once a borrower has failed to make payments on that debt for 180 days or more.
Once a creditor has written off your debt, they may continue to seek payment, outsource to a collection agency or sell the debt to a collection agency.
For example, if you haven’t made a payment on a credit card in more than six months, the lender will charge off your account as a bad debt and may send it to a collection agency. First, though, they’ll report it to major credit agencies, which will keep the charge off on file for seven years while you pay off a debt.
Should I pay charged-off accounts?
Don’t ignore a debt just because it’s been charged off. When lenders write off your account as bad debt, it will show on your credit report, and either way, the debt will stay with you. The debt won’t be forgiven just because it’s been charged off.
That means if you’re interested in buying a home, buying a car or opening any other lines of credit, such as a business or personal loan, a charge off may negatively affect you.
How much does a charge off affect your credit score?
A charge off can have a negative impact on your credit score and remains on your credit report for seven years. Lenders may be wary to extend you a line of credit when you still have a charge off on your account, especially if you haven’t created a payment solution with your debtor.
The seven-year period begins as soon as your account has been charged off, which means that if you begin repayment after three years, the charge off will remain on your credit report for an additional four years.
Will paying off charged-off accounts raise my credit score?
It may take some time to repair your credit once your debt has been charged off. It won’t improve immediately, but it can improve over time, even as the charge off stays on your credit report. You’ll have to wait out the seven years for the charge off to be removed from your credit report, even after you’ve paid off the debt in full. You can also take actions to have the charge off removed from your report, which are covered below.
What to do if your debt is charged off
Take action as soon as possible once you’ve found out your account has been charged off as a bad debt. You have a few options available to take care of your bad debts and remove them from your credit report.
How do I pay charged-off accounts?
While a charged-off account can damage your credit, and paying the debt back may seem insurmountable, you have a few paths forward you can take.
Negotiate with the creditor or collection agency.
- If you’re unable to pay off the outstanding debt in full, try to negotiate with your creditor or the collection agency, as you may be able to come to an agreement on a repayment plan that you can afford. Make sure you get the agreement in writing.
Seek out a debt settlement.
- You can also approach a lender or collection agency to settle your debt for less than what you originally owed. While this sounds ideal, it may come at a cost. It can take a significant toll on your credit report, and some lenders don’t undertake debt settlement cases or deal with debt settlement agencies at all.
- Also, keep in mind that if you settle your debt, the amount that was forgiven or canceled may count as income, and you may have to pay taxes on it.
Enroll in a debt management program.
- You can seek help from a nonprofit credit counseling group for advice on how to handle charged-off debts. These organizations can help you come up with a plan to repay your debts and help you learn how to manage your money for the future.
- An agency may be able to work with your lenders to come up with an agreement to cut interest rates, late fees and penalties so you can pay off these debts within three to five years.
How do I remove charge offs from my credit?
In addition to paying off your debts, you can also take steps to remove charge offs from your credit report.
Verify the debt.
- First, be sure to verify your debts, including the outstanding balance and charge-off date.
- If there are any errors, dispute them. Once they’ve been resolved, you can move forward to remove charge offs from your report.
Negotiate with original lender.
- Work with a lender to remove a charge off from your credit report in exchange for repayment.
- If you agree to set up a repayment plan or pay the debt off in full and obtain an agreement in writing, you may be able to negotiate with a lender to pay off the debt and remove the charge off from your credit report.
Wait it out.
- If you’re already several years into a charged-off debt and in repayment, you can always wait it out until the charge off is removed.
- The charge off will be removed from your credit report after seven years, regardless of whether you take steps to expunge it from your report. Even better, as you pay your bills on time, your credit should continue to improve during that period, too.
The most important thing to remember is that charged-off debt shouldn’t be ignored. By taking action, you can ideally limit the financial impacts and get on track for a better future.