A charge-off on a loan balance is very damaging to your credit. The creditor will list the charge-off on your credit report by sending the information to major credit bureaus such as TransUnion, Exquifax and Experian. As a result, your credit score could fall, and other creditors may reject your applications for new credit or charge high interest rates because of the charge-off.
Timing
Creditors such as credit card companies will usually close accounts and list them as charged off after the loan account is six months past due. Some charge-offs occur sooner than that. Creditors try to avoid charge-offs by making repeated attempts to contact the borrower as the account falls behind. Some lenders offer to reduce payments for a while as the borrower works through a temporary financial hardship, and other lenders may also agree to lower interest rates temporarily. If the borrower continues to miss payments the lender will eventually list the account as charged off.
Definition
A charge-off is an accounting term used by creditors. It does not end the borrower's responsibility for paying the loan. After charge-off, the debt never dies or expires, although some states have statutes of limitation that restrict how long debt collectors have to pursue the debt through the court system. However, the laws do not prohibit the debt collector from pursuing the debt in other ways, such as sending notices by mail or contacting the debtor by phone.
Process
After charge-off, the original creditor usually sells or assigns the charge off to a debt collector. The debt collector begins the collections effort by sending the debtor a written notice about the debt. Some debt collectors may attempt contacting the debtor by phone first, but the delivery of the written notice officially starts the collections process. After receiving the notice, the debtor has up to 30 days to dispute the debt collector's right to collect. The Fair Debt Collection Practices Act gives debtors the right to request that the debt collector prove that it has the right to collect the debt and that the debt is valid. The debtor must send the request to the debt collector in writing. After receiving it the debt collector must verify the debt by sending the debtor documentation such as the original credit application or a copy of the final billing statement.
Options
Debtors have options following the sale or assignment of the charge off. Many debtors elect to settle the debt with the debt collector. SmartMoney reports that debt colletors sometimes settle unsecured debts, such as credit cards, for 20 to 70 percent of the balance. Most debt collectors also offer payment plans. The most severe option for debtors is bankruptcy. One form of bankruptcy, Chapter 7, eliminates charge offs and other unsecured debt in just months.
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