What Does a Charge-Off Mean? Effect on Credit Score and How to Remove

What Is a Charge-Off?

A charge-off means a company has written off a debt because it does not believe it will receive the money that it’s owed. A delinquent borrower is still responsible for paying debt that is a charge-off.

A creditor or lender may use a charge-off when the borrower has become substantially delinquent after a period of time. Having a charge-off can mean serious repercussions on your credit history and future borrowing ability.

How a Charge-Off Works

A charge-off usually occurs when the creditor deems an outstanding debt uncollectible; this typically follows 180 days or six months of nonpayment. However, the borrower is still legally responsible for paying a debt marked as a charge-off.

In addition, debt payments that fall below the required minimum payment for the period will also be charged off if the debtor doesn't make up for the shortfall. The creditor crosses off the consumer’s debt as uncollectible and marks it on the consumer’s credit report as a charge-off.

The fallout for having a charge-off on your credit report includes a fall in credit score and difficulty in getting approved for credit or obtaining credit at a lower interest rate in the future.

Paying off or settling the overdue debt doesn't mean the charge-off status will be removed from the consumer’s credit report. Instead, the status will likely be changed to “charge-off paid” or “charge-off settled.”

Either way, charge-offs remain on the credit report for seven years, and the affected party will either have to wait out the seven years or negotiate with the creditor to have it removed after paying off all the debt. In the latter case, if the inability to repay the debt on time was due to a temporary setback like job loss, the debtor could write to the lender explaining the issue, including proof of a good payment history up until the time of the setback.

What Happens With Charged-Off Debt?

The statute of limitations is the amount of time that a debt can be collected through the legal court system. Once the statute of limitations has passed, the debt is deemed too old to be collected. In this case, the borrower cannot be brought to court for the unpaid debt.

In fact, the debtor can countersue the collections agency that took them to court over a time-barred debt. A debtor can also sue if an agency attempting to collect on an old debt is asked not to contact the consumer again and does so anyway. Such actions are in violation of the Fair Debt Collection Practices Act (FDCPA).

On the other hand, the removal of a charge-off status from a consumer’s credit report doesn't mean the statute of limitations has passed. If, after seven years, the charge-off is deleted from the report, the statute of limitations may still be in effect. In this case, the consumer can still be taken to court for a judgment on their unpaid debt. Each state has its own statute of limitations on debt, which, depending on the type of debt, could be as low as three years or as high as 15 years.

Note that just because a debt has passed the statute of limitations on its payment doesn't mean that the consumer no longer owes. It just means that the creditor or debt collector will not be able to get a judgment in court for the payment of the old debt.

Creditors refer to uncollectible debt as bad debt. When a firm incurs a bad debt, it writes off the uncollectible amount as an expense on the income statement. For a debt to qualify as a business bad debt, it must be incurred as part of normal business operations. The debt can be associated with another business or an individual. Bad debt charge-offs are more likely to occur when associated with unsecured forms of credit, such as credit card debts or signature loans.

The Bottom Line

A charge-off means that a lender has written off a loan as a loss. However, if you have a loan that is a charge-off, you're still obligated to pay it.

Having a charge-off on your credit report can negatively affect your ability to get future loans. So consider either paying down your charge-off loans as soon as possible or negotiating with the lender for a pay-for-delete agreement to remove it from your credit report.