What Happens If You Don't Pay Charged Off Debt?

Although a creditor gives up on trying to collect debt when he initiates a charge-off, this does not absolve the debtor from paying it back. What action the creditor takes after charging-off a debt depends mostly on the size of the debt. Either way, a charge-off will probably do damage to your future financial goals.

Identification

Creditors must charge-off debt to deduct it on their taxes and to complete the transactions in their accounting books. Once charged-off, it will probably go to a collections agency within the company or to a third-party debt buyer who will attempt to get payment. For large accounts, usually over $1,500, the creditor may sue you to obtain a judgment that could include wage garnishment.

Effects on Credit

The FICO score severely punishes consumers with collections accounts because it shows an unwillingness or inability to pay off a commitment. Judgments against an individual tend to bring scores down between 85 and 160 points, according to CNN. The impact of a collections account expands when credit scores climb. This will make it harder to obtain credit in the future or cause lenders to charge you higher interest rates.

Time Frame

Federal law requires credit reporting agencies to remove a collections account from your record after seven years from the date of the charge-off. Since most lenders charge-off an account after 180 days of no payment, this is seven and a half years for most people. Collections agencies cannot report a date of delinquency after the charge-off date. You can dispute an item with the credit bureaus if you see an incorrect date.

Tip

You can remove a collections account from your record only by negotiating with the lender, not a third-party. Creditors may claim the account delinquency as an error in return for a partial or complete payment.

Paying a charge-off does not improve your credit rating, but lenders like to see paid-off accounts as a sign of good faith. Also, you won't owe on the debt after the statute of limitations passes. Each state has its own laws on when debts become noncollectable. When a creditor or collector sues you after the statute of limitations, you can tell the judge you refuse to pay because the debt is too old. You will renew the statute of limitations by admitting to the debt or repaying some of it -- so make sure to avoid saying anything other than you absolve responsibility for the debt once the statute of limitations passes.