After 180 days, most creditors will charge off any unsecured debt, such as a medical bill or credit card debt, that you leave unpaid. The creditor can then write off the debt on its taxes as a business loss. A creditor's willingness to charge off a debt, however, does not exonerate you from your responsibility to pay it.
Significance
Your charged-off debt doesn't cease to exist simply because your creditor claimed it as a loss on its taxes. You still owe the debt, and most charged-off debts are turned over to collection agencies. A collection agency will employ aggressive tactics when attempting to procure payment from you, such as making frequent telephone calls to your home or office and sending you collection letters through the mail.
Facts
Only debts that aren't secured by property are subject to being charged off by creditors. Because the debt you owe is unsecured, the collection agency that purchases the debt cannot force you to pay the outstanding balance without a court judgment. If the company sues you and wins a judgment, however, it can use legal force to garnish your wages, seize your bank accounts or place a lien against your home.
Time Frame
The statute of limitations for bad debt collection differs by state, but dictates the time any creditor has to file a lawsuit against you. Each state's statute of limitations begins 180 days from the date you last made a payment on the account in question -- approximately the same time the debt was charged off by the original creditor. If the statute of limitations in your state has already expired, no creditor can legally sue you and force you to pay off the bad debt.
Features
Although a creditor cannot force you to submit payment on your defaulted account without suing you, paying off a charge-off can prevent additional damage to your credit rating. Your credit score suffers significantly from missed payments, the charge-off itself and the resulting collection account. The Fair Credit Reporting Act notes that these items can linger on your credit report for up to seven years.
While paying off the charge-off doesn't remove the derogatory record of the debt, it does prevent a judgment. Judgments lower your credit score considerably and, depending on your state's laws, can remain a part of your credit history for longer than seven years.
Warning
Waiting to pay off your charge-off can result in the debt growing to unmanageable proportions. If your contract with the original creditor included periodic interest charges, as most credit card agreements do, any collection agency that purchases the charged-off debt can add interest to the balance. Even if your original creditor did not charge interest, any creditor with a judgment against you can legally add interest to the judgment each year that your debt goes unpaid.
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