Once the original lender charges off an account, it’s usually submitted to a collection agency. The agency will then try to recover the unpaid balance along with additional fees and interest. Sometimes, the collection agency represents the original lender. On the other hand, it may buy the debt from the lender and become the new owner of the debt. In any case, you chose to sign a contract to agree to repay the debt. Therefore, that contract will remain in effect until which time the entire amount is paid off or a new agreement is reached with the owner of the debt in order to repay it.
If, however, the debt is subsequently sold to a collection agency, then the collection agency must be paid off rather than the original lender. After seven years, the charged off account along with any other collection accounts will be readily removed from your credit history. However, it will have a negative impact on your credit score throughout that time.
Missed Credit Card Payments
After six consecutive months of missing a payment, delinquent credit card accounts are typically charged off. Sadly, by the time you’ve let yourself get that far behind on making payments, it’s virtually impossible to successfully get caught up again on your account. Prior to getting your account charged off, it’s likely that your creditors were calling nearly every day trying to determine when you were going to submit a payment. Following a charge off, creditor calls immediately stop. What now? You think you’re off the hook since they stopped calling, but you still owe that money.
Charge Offs 101
Many people have a common misconception about what a charge off actually means. Most mistakenly think they no longer owe the money, which is understandable since the phrase ‘charge off’ sounds like ‘write off’.
When creditors charge off an account, they’re basically declaring it as a financial loss and then writing that loss off on their taxes. In the end, the creditor may owe the IRS a bit less. However, you’re still liable for repaying the amount of the debt, unless the debt is discharged due to filing bankruptcy or it’s canceled for some other reason. In spite of either of those cases, the creditor can still try to collect on the unpaid debt and may even sell or assign a third-party debt collector to pursue collection activities.
In general, charge offs are much harder to repay since at that point the creditor will require that you pay the entire balance, which means you no longer have the opportunity to make payments each month over time in order to pay it off. However, if you contact the creditor, chances are you can successfully negotiate the entire balance that’s due into a few, maybe three, payments. But, you no longer have the privilege of paying it off over the course of several months like you could before your charge off.
Should I Pay Charged Off Accounts?
If you ignore the charge off account, it will still be listed and considered an outstanding debt with regards to your credit report. It’s likely that you’ll have a great deal of trouble getting approved for a loan, credit card, or any other credit-based service as long as the charge off is unpaid. The assigned debt collector or creditor can keep pursuing you indefinitely for an unpaid charge off, which can involve constant calls, sending you letters, and updating the content of your credit report. If the debt is legally within the timeframe regarding the statute of limitations for your state, you can potentially be sued as well.
How a Charge Off Affects Your Overall Credit
Your original creditor will report the amount you owe along with the status of your charge off to the main credit bureaus. Unless you can successfully negotiate a payment arrangement with the creditor, your charge off status will stay on your credit report for the entire credit reporting time limit. Even if you pay the charge off, it will not erase the previous status of your charge off or eliminate it from your credit report. Even though paying your charge off won’t instantly boost your credit score, it will make you look more responsible in the eyes of future creditors and financial lenders. Therefore, you’ll have a better chance of getting any future applications successfully approved.
Make Sure the Debt is Legitimate
Keep in mind that you need to ensure that the supposed debt you owe is legitimate. Also, is the collection agency licensed? Do they legally have the right to collect debt in your state? For the most part, repaying the debt won’t positively impact your credit score, but getting the collection agency to remove the item from your report in return for payment can help a great deal.