What Does Charged Off as Bad Debt Mean?
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A charge off can happen when a company is owed money and it believes it won’t get repaid. Often, this happens when a borrower misses several payments in a row or declares bankruptcy.
By charging off the account, the company can write off the debt from its book and take a loss — offsetting revenue and potentially lowering its taxes. However, depending on the situation, the borrower may still owe the money.
- When will your debt be charged off?
- What to expect if you have charged-off accounts
- How to remove a charged-off account from your credit reports
- Avoid your account being charged off as bad debt in the future
- Focus on the long term
When will your debt be charged off?
A charge off generally won’t be your creditor’s first response to a missed payment. You might get a late payment notice and have to pay a late payment fee. Once you’re 30 days late, your creditor may also report the late payment to the major credit bureaus — Experian, Equifax and TransUnion. However, there’s still a chance you’ll catch up on your payments and bring your account current.
After you’ve missed several payments in a row, your creditor may then decide to charge off your account. The exact timing can vary depending on the creditor and type of account, though. For example, a personal loan company might charge off an account after a payment is 120 days past due, but credit card companies might wait until a payment is 180 days past due.
What to expect if you have charged-off accounts
1. You might still have to pay
A charge off doesn’t automatically clear you of the debt. That’s because it’s an accounting procedure rather than a form of debt cancellation or forgiveness. A creditor could charge off your account and then try to collect the debt — it may even sue you for it.
If the company doesn’t want to try and collect the unpaid debt, it may reclaim some of its losses by selling or transferring your account to a collection agency. Debt collectors may buy accounts for less than their face value (sometimes pennies on the dollar), and then try to make money by collecting the debt.
2. Your debt could be canceled
Creditors can alternatively choose to cancel your debt when they charge it off, and you’ll no longer owe the money. However, if a creditor cancels $600 or more, then the company will send you and the IRS a copy of a Form 1099-C.
The cancellation of debt form states how much debt was cancelled, and you may need to include this amount in your income for the year. (You also might need to include cancelled debt for lower amounts, but the company isn’t required to send you a Form 1099-C.)
There are exceptions if your debts were cancelled as part of a bankruptcy or if you’re insolvent (you have more debts than assets). In these cases, you may not need to include your cancelled debts in your income for the year.
3. Your credit will likely be affected
Your creditor can report the charge off to the credit bureaus, along with your account’s information and the past-due amount. A charge off on your credit reports is considered a derogatory (i.e., negative) mark that could hurt your credit scores. If your account gets sent or sold to a collection agency, the collection account could be added to your credit reports, which may also have a negative impact on your scores.
Paying off a collection or charged-off account won’t remove these negative marks from your credit reports. However, a paid charged-off account with a zero balance may be better for your creditworthiness than an unpaid delinquent account.
Whether or not you pay the debt, the charge off can stay on your credit reports for up to seven years from the date the account first went past due. The date of first delinquency and timeline stays the same even if your account is sold or transferred to a new collection agency, which could happen several times if you don’t repay or settle the debt.
How to remove a charged-off account from your credit reports
Once your account is charged off, you might have to live with the derogatory mark until it falls off your credit reports. However, you should carefully review your credit report for mistakes.
For example, if your debt is canceled after being charged off, then the balance on your account should be zero because you no longer owe the money. Similarly, if the original creditor sells the debt to a collection agency, then the balance should be zero on your original account and the past-due amount will appear under the new collection account.
If you notice an error on one of your credit reports, you can file a dispute with the credit bureau to try and correct the information. You may be able to attach relevant documents, such as Form 1099-C, to show why you believe there’s an error.
Negotiating to have a debt taken off your credit report
Another option may be to negotiate a pay-for-delete with the creditor or collection agency. In exchange for paying the past-due amount, or perhaps settling for a smaller amount, you’ll ask company to tell the credit bureaus to delete your account.
Creditors and collection agencies aren’t required to agree to this offer as the charge off and associated accounts may be accurate records. But sometimes (and generally with collection agencies rather than original creditors), it could be a way to get a charged-off account removed.
Avoid your account being charged off as bad debt in the future
- Contact your creditor
- Ask about hardship options and payment plans
- Negotiate a settlement
- Work with a credit counseling agency
1. Contact your creditor
You may be able to work with your creditors to avoid having your account charged off as bad debt. The first step is to keep your creditors up to date with your current address and contact information to avoid accidentally overlooking accounts or bills.
You should also contact your creditors as soon as you think you might miss a payment. In some cases, there may be a short grace period that allows you to pay late without incurring any additional fees or penalties. You can use this information to decide the order in which you’ll pay your bills.
2. Ask about hardship options and payment plans
If you know you won’t be able to afford your bill by the due date, ask if the creditor offers any hardship assistance or alternative payment plans. You may be able to lower your interest rate, decrease your monthly payment and avoid fees if you work out an agreement with your creditor before you fall behind on your bill.
3. Negotiate a settlement
When your accounts are already past due, but before they’ve been charged off, you could try to negotiate a settlement offer with your creditor. With debt settlement, the creditor agrees to accept a smaller payment and consider the debt repaid. The difference may be canceled debt that’s taxable income for the year.
4. Work with a credit counseling agency
If you’re looking for assistance taking control of your money or dealing with your creditors, a nonprofit credit counseling agency might be able to help. They offer a variety of services, including debt management plans.
With a debt management plan, the agency will negotiate with your creditors to lower your rates or payment amounts, collect a single monthly payment from you and then distribute the money to your creditors. You can find local agencies in the National Foundation for Credit Counseling’s directory.
Focus on the long term
While a charged-off account can hurt your credit, like other derogatory marks, the impact will decrease over time. Repairing your credit and getting the account removed may be on option if there has been a mistake, and you can also focus on improving your credit by adding new, positive information to your credit reports. However, it’s best to avoid the situation altogether by working with your creditors or finding assistance elsewhere before a charge off occurs.