Many consumers misunderstand what a charge-off is. Though a company may list a debt as a charge-off, this does not mean the consumer no longer owes the debt. Companies can continue to attempt to collect charged-off debts. A consumer with a charge-off should understand how the charge-off process works and how to deal with the debt.
Definition
A charge-off is an accounting practice in which the creditor claims that the company cannot collect the debt. As this creates a business loss for the company, the company receives a tax deduction, because the loss reduces the amount of the company's profit. Often, creditors do not charge off accounts until six months or more after the account becomes delinquent, according to Bankrate. Though the company marks the account in its books (and the consumer's credit report) as a charge-off, the debt is still legally owed, and the company can, and generally will, continue to try to collect the debt.
Collection Activities
Though the original creditor may continue to attempt to collect a charge-off, the company often will hire a collection agency to collect the debt. The original creditor may also sell the debt to a collection agency, which will attempt to collect on the debt. A consumer dealing with collection calls or letters about a debt owed should be aware of her rights under the Fair Debt Collections Practices Act. The act requires that collectors follow rules of conduct, such as only calling during specific hours (between 8 a.m. and 9 p.m.), not using abusive or threatening language and not making false statements.
Negotiating with the Creditor
Whether a consumer is contacted by the original creditor or a collection agency about an account marked as a charge-off, the consumer may be able to negotiate a settlement to pay less than the amount of the original debt. Because the creditor does not believe it can collect the full amount, many will settle for some payment rather than no payment. A consumer may be able to settle an old debt for a fraction of the original amount. As part of the negotiation, try to have the creditor agree to remove the charge-off from your credit report in exchange for the settlement payment or for payment in full. Before making payment on the settlement to the creditor or collector, a consumer should insist on having the terms of the settlement agreement in writing.
Advantages of Paying Charge-offs
A charge-off is a serious detriment to a consumer's credit score. One charge-off may reduce a consumer's credit score enough to make it difficult or impossible for him to borrow money or obtain a favorable interest rate for a loan. Some employers, insurance companies and landlords also check a consumer's credit report, and a charge-off may limit the consumer's ability to get a job, purchase insurance or rent an apartment. By paying off the charge-off, a consumer will see some immediate improvement in his credit score, and the consumer can begin to rebuild a solid credit history. Generally, a charge-off remains on a consumer's credit report for seven years. If it has been paid or settled, it will be reported as such, unless the creditor agrees to have it removed.
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