A “charge off” is one of the most severe credit delinquencies a borrower can receive on their credit report. While not quite as harsh as a bankruptcy or foreclosure, it is definitely in the same tier, and should be avoided at all costs.
So what exactly is a charge off, and why is it called such?
If a credit account is not paid on time it will eventually go into collection status. If it is not paid at that time or successfully disputed with the creditor, it will enter charge off status, often after six months of non-payment.
The reason it’s called a charge off is because corporations file a Profit and Loss statement with the IRS each year detailing the companies profits, and the losses, including bad debt that is essentially charged off as a business expense. It’s very typical for large corporations to claim these losses and it’s factored in as part of doing business.
Though the amount in question is written off at the end of the tax year, it is still legally collectable, and there’s a good chance a collection agency will continue to badger the consumer for the money, or a portion of it. And if the amount is over $1,500 it’s possible that the company may start a lawsuit to collect the outstanding debt.
One important thing to note about charge off accounts is if you decide to pay out, don’t be surprised if it remains on your credit report. Per the Fair Credit Reporting Act, a charge off account will remain on your credit report for seven years from the original date of delinquency. That said, don’t worry about “resetting the clock” if you decide to pay the charge off. It is less detrimental to have a paid charge off than an unpaid charge off.
If you do have a charge off on your account make sure you take action immediately. There are several courses of action possible.
First, dispute the claim directly with the creditor. If they fail to budge, write a letter to one or all of the credit bureaus detailing the dispute. If the creditor doesn’t respond within 30 days they will remove the item entirely from your credit report.
If you know the charge off is legitimate work with the original creditor directly to make a deal. Don’t ever try to cut a deal with a collection agency as you’ll surely get burned. If you work directly with the creditor you may be able to get the charge off removed from your credit report by making a partial or full payment.
No matter what course of action you decide on, ensure you get everything in writing, and never take anyone’s word on anything!
If you have a credit report handy and you think you have a charge off, look for the number “9” next to the appropriate credit line. This is the symbol for an account in charge off status.
