Can a Debt Be Written Off or Sold?

Everyone has an obligation to pay his debt. But if missed payments go unresolved, creditors and lenders may write off or sell the debt. Having a debt written off or charged off doesn't erase the obligation. Before your lender writes off or sells a debt, be aware of the consequences of this action.

Charge-Offs

A debt that is written off often is called a charge-off. This typically is done after about six months of non-payment, and by this time, lenders and creditors are convinced a borrower will not repay the debt. Once a lender or creditor charges off a debt, it stops collection attempts. This method doesn't excuse borrowers from the debt. Rather, lenders and creditor charge off debts for tax purposes, and this allows them to write off the loss.

Selling a Debt

In conjunction with charging off a debt, creditors and lenders may contact a collection agency and sell the agency the debt. Collection agencies work alongside lenders and creditors to recover unpaid debts. If the agency is able to collect, it receives a commission based on the balance. Collection agencies typically use letters and telephone calls to debtors to attempt to collect all or a percentage of the debt.

Dangers of Charge-Offs and Collections

Charge-offs and collection accounts appear on credit reports. Although a lender may stop collection attempts, unpaid debts can harm credit scores and remain on reports for a period of seven years. Charge-offs and collection accounts can create a negative snowball effect. Future lenders may not extend a line of credit as a result of past payment problems, and having charge-offs and collection accounts on your credit report may warrant higher interest rates if you are approved for credit.

Dealing with Old Debts

Charge-offs and collections can result from legitimate financial issues, such as losing a job or being out of work because of illness. Lenders and creditors may understand these situations, and if you make payment attempts and pay off the debt once your finances improve, the lender or creditor may erase a charge-off or collection from your credit report. Even if the entry is not erased, the creditor at least may report that you paid the debt. Reporting that the account is paid won't necessarily improve your score, but it can help you qualify for loans in the future. A mortgage lender may hold off approving your application until you pay charge-offs and collection accounts.