Far from a “get out of jail free” card, having a charge-off filed to your credit report is just the beginning of a long list of potential problems. Your phone will start ringing with unpleasant people on the other end of the line, your wages could be garnished and your credit score will take a nosedive.
And, that’s just the beginning of what you need to know about credit charge-offs.
What is a Charge-Off?
Rather than being taken off of your ledger, getting a charge-off means the creditor has given up on working with you to bring the obligation current and has written the loan off as bad debt. The account is then closed and the debt is sold off to a collector, who will proceed to pull out all the stops in an effort to exact payment.
The original creditor will file your account as a loss on their taxes and get an IRS deduction. Meanwhile, given 35 percent of your credit score is derived from your payment history, a charge-off — second only to bankruptcy — is one of the worst things you can have on your credit report.
Should You Pay Them Off?
Lenders who see charged-off debts in your history are going to be unwilling to extend credit to you. However, a paid charge-off is viewed more positively than an unpaid one, which is a good thing because it will show up on your report for seven years.
Working with a debt relief company like Freedom Debt Relief can help you resolve charge-offs and put you back on the road to a better credit score. This is particularly true when your financial situation is such that paying it off in full will be a burden.
No Forgiveness is Given
As we mentioned above, charging a debt off is not the same as forgiving it. Even with that ugly mark on your credit history, you’ll still be liable for the satisfaction of the obligation.
Moreover, anyone who subsequently owns the debt can take you to court to secure a judgment against you to force payment — until the statute of limitations runs out on the debt. And, even then, you’ll still owe the money.
In addition to the garnishment of your wages — as well as your bank accounts — your income tax return check could be seized and liens could be placed against any real property you own when a judgment is filed against you.
How Long Does it Take to Get One?
Odds are, you’ll have heard a lot from that creditor before the account gets formally charged-off. In most cases, you’ll have to be somewhere between 120 and 180 days late to get one. In the interim, the lender will have tried every legal method available to them to get you to pay.
The best way is to pay your bills on time all the time. However, life does throw curve balls, knuckle balls and screwballs. There might be times when you strike out no matter how hard you try to get a hit.
You strongest bet in such a case is to let your creditors know hard times are on the horizon and you’re trying to work something out for their benefit and yours. After all, they’ll lose money if the account gets charged-off and sold to a collector, Working with you at least gives them an opportunity to get as much of their money back as possible.
These are the broad strokes of what you need to know about charge-offs. As you can see, they’re highly undesirable. In every circumstance, you’ll be better off settling the debt than just letting it go.