A charge-off is a debt that is written off as a tax loss by a creditor after non-payment by a consumer---normally after six months of no payment. These charged-off accounts are reported on a consumer's credit file, and are often purchased by debt wholesalers who will attempt to collect on the debt from the consumer.
Significance
According to Gerri Detweiler, author of "The Ultimate Credit Handbook," a charged-off debt is the common accounting term used by creditors when completing an annual profit and loss statement for the IRS. Charged-off accounts are a tax write-off for the creditor, but it does not limit the consumer's responsibility to repay the debt. Creditors and debt collection agencies can pursue all legal venues available in the consumer's state of residence to collect on the debt while it is valid under the state's statute of limitations. The statute of limitations will range from four to 10 years depending on the state, and the type of debt.
Time Frame
While the debt is valid under the statute of limitations, the consumer is under a legal obligation to pay the charged-off debt. At times, the consumer can settle either with the creditor or the collection agency that purchased the debt for less than the total balance. However, once the statute of limitations has expired on the debt, the consumer does not have to legally repay it, but the debt can still be present on their credit report for up to seven years, which will hurt their ability to obtain new credit.
Considerations
According to an article on MSN Money, there are times that settling old charge-off accounts can damage a person's credit, even if settling the debt for less than the balance owed. The impact paying off a charge-off account has on a consumer's credit will depend greatly on whether or not it is paid or settled during or after the statute of limitations expires in their state.
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