The final step an issuer will take to collect on their debts is known as a charge-off. In the simplest terms, a charge-off is a declaration by a creditor that an outstanding debt is unlikely to be collected.
Read more to understand how a charge-off can happen and what you can do to prevent this from happening to you.
Reasons for a Charge-Off
If you repeatedly fail to make your credit card payments on time, your credit card account becomes delinquent. Once your account becomes delinquent, your creditor will attempt to collect these funds. Lenders are first and foremost concerned with recouping their losses, so you will receive ongoing notification of overdue accounts through calls, emails and messaging.
Usually, a charge-off happens after six months of delinquency. But you should have many opportunities to prevent a charge-off, if you are proactive.
To avoid being caught off guard by a charge-off:
- Ensure your creditors have up-to-date contact information
- Open and respond to any letters sent regarding a delinquent account
- Contact your creditor if you cannot make the minimum payment to discuss ways to keep your account in good standing
If your account is in the early stages of delinquency or if you are determined to have a low risk of defaulting on your debt, your creditor will likely continue to try to collect the amount from you directly.
Once your creditor determines you are unlikely to repay the amount owed, your creditor can “charge-off” your debt. Charge-offs usually occur if your account received no payments for six months, although some creditors can initiate a charge-off after 120 days.
Charge-offs can occur even if you are making payments. You are more likely to see this if payments are habitually late or under the monthly minimum. If you file for bankruptcy, your account may also be charged-off. Additionally, if you enter into a debt settlement plan before a charge-off with your creditor, the forgiven amount can be charged-off once the settlement agreement is fulfilled.
Who Owns Your Debt?
If your account designation on your credit reports is “charge-off,” the original creditor still owns your debt. You can contact them directly to make payment. Once your debt is sold, your credit report designation will be changed to “collections.” At this point, you would need to deal with the debt buyer who now owns your debt.
Who Contacts You About Your Debt?
Some credit card companies keep their collections calls in-house while others hire agents to call on their behalf using the name of the credit card company. It is likely that charge-off collection calls are being conducted by a third-party collection agency. Because you do not know which of these entities you are speaking to, make sure that you get any agreement you reach in writing.
If you are negotiating a payment schedule to avoid a charge-off, ensure your agreement is in writing and request that it includes that if you abide by the payment schedule the credit card company will consider the debt satisfied and not initiate a charge-off.
Credit and Legal Impacts From a Charge-Off
Legally, you are still responsible for the amount owed to a creditor, even with a charge-off. The company that owns your debt is committed to recovering as much of your debt as possible. The creditor may use internal collections, third party collection agencies, litigation or debt sale.
Impact on Your Credit Score
Once a charge-off occurs, it is reported to at least one of the major credit reporting agencies: TransUnion, Equifax or Experian. If your debt is sold, it might actually appear twice on your credit report, once from the original creditor and once from the debt buyer.
A charge-off is considered a serious negative event on your credit report and indicates that you defaulted on your commitment to pay a debt. This credit designation could indicate to future creditors that you are high-risk and unable or unwilling to repay any credit they may extend to you.
Some creditors will view a charge-off on your account as grounds for denying a loan or credit line. Other companies may take the risk, especially if your charge-off is paid, but you are unlikely to get the best terms for any future lines of credit.
Litigation
The 2021 Consumer Credit Card Market Report indicates that credit issuers litigated almost 12% of their charge-off inventory. If a creditor sues you and you are unsure what to do, speak to an attorney. You may have access to free or reduced attorney services.
Outside of some debt owed to the government, a creditor can not garnish your wages without a judgment, an official determination of financial obligation resulting from a lawsuit. It is important not to ignore a legal complaint as doing so may forfeit your right to defend yourself and result in a judgment and potential wage garnishment.
Know Your Rights
The Fair Debt Collection Practices Act (FDCPA) protects you from unfair treatment from debt collectors. In general, debt collectors can not:
- Make contact at inconvenient times: A collector may not call you before 8 am and after 9 pm or while you’re at work if you indicated you can not receive calls there. They may also only contact you once in a 24-hour period if they know the intended person was reached.
- Misrepresent themselves or your debt: Debt collectors cannot try to collect more than the amount you owe. They also cannot falsely claim to be an attorney if they are not.
- Use threats: Debt collectors cannot threaten to arrest you or make threats that can not legally be enforced or that they do not intend to enact.
- Harass or use certain language: Debt collectors can not subject you to obscene, profane or other abusive language.
If you believe a debt collector is not behaving according to the Fair Debt Collection Practices Act, you can file a complaint with the Consumer Financial Protection Bureau.
What To Do If a Debt Collector Is Calling
Request Proof of the Debt
If a debt collector contacts you claiming that you owe money, by law they must disclose the name of the creditor and the amount owed. They must also tell you your right to dispute the debt. You have 30 days to dispute the debt in writing or request verification of the debt.
If the debt collector does not receive a dispute in 30 days, they will assume the debt is valid and you may forfeit your rights.
Answer the Phone
If you have ever felt badgered by debt collectors, you may be tempted to ignore their phone calls. Doing so may fix the problem at the moment, but will only compound your troubles.
Keep Detailed Records
Maintain a file with all communication and documents sent to you by the debt collector and copies of all letters you send to them. Keep a call log of all phone calls you receive from your collector including the date, time and summary of what was discussed.
Who To Contact for Help
There are significant differences between agencies who claim to help you with your debt. Debt settlement companies, also known as debt relief or debt adjusting companies, are for-profit organizations. Their primary objective is to make money by negotiating with your creditors. On the other hand, most credit counseling organizations are nonprofit and do not financially benefit from the advice they give you.
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Debt Settlement Companies
Debt settlement companies can leave you in greater debt than when you began. Generally, they charge expensive fees and encourage questionable debt management practices.
They may instruct you to stop paying your bills which will result in late fees, penalties and additional interest. You may be required to open a dedicated bank account and give the settlement agency access for future negotiated payments. The third-party bank for the dedicated account is also allowed to charge you a reasonable fee for this service.
Some creditors may refuse to work with specific debt settlement companies and many will be unable to settle your debt. Most importantly, you may still be sued even when working with debt relief organizations.
Before engaging a debt settlement company, consider the risks involved and contact your state attorney general’s office to determine if the company has pending consumer complaints. Make sure you understand all the fees involved. It may be possible to settle the debt yourself, although that carries risks as well.
Credit Counseling Agencies
Credit counseling agencies have counselors who are often certified or trained in the areas of consumer credit and financial management. Often their services are free of charge and intended to help educate you. Reputable credit counselors offer informative, no-pressure advice to help you evaluate the best course of action in managing your debt.
Bottom Line
If you are facing a charge-off, contact your creditor immediately to determine if you can take action to avoid it. If your debt is already in charge-off status, make sure to respond to correspondence from the creditor. Familiarize yourself with your rights and reach out to a local credit counselor to explore your options.
