Your credit card company typically allows you six months to make payments on a delinquent credit card before charging off the balance. While many debtors mistakenly believe that a charge-off indicates the credit card company has forgiven their debt, the credit card company can continue to pursue payment on its own or hire a collector to secure payment from you. While paying a charge-off prevents further consequences, doing so may not be the right move for everyone.
Preventing Legal Action
Depending on the company's policies and the amount you owe, the credit card company may sue you after charging off your card balance. If you have a job, own a home or car or have a bank account, a lawsuit threatens your financial security. A credit card company or debt collector that wins a lawsuit can request an order from the court allowing it to garnish bank accounts or wages and attach a lien to your home or car title. Paying the charge-off prevents this from happening, ensuring that your assets remain safe from seizure.
Judgment-Proof Debtors
Not everyone benefits from paying a charge-off. Judgment-proof debtors are individuals whose assets are legally exempt from seizure. For example, a credit card company or debt collector cannot garnish your retirement or unemployment payments. A judgment-proof debtor not only possesses exempt assets but also owns no property that a creditor can place a lien against.
If you are judgment-proof, the credit card company can sue you and obtain a civil judgment for the unpaid charge-off, but it cannot enforce its judgment. Thus, paying the debt benefits you if you are morally inclined to satisfy your obligation, but the financial penalties of leaving the charge-off unpaid are minimal in this situation.
Credit Concerns
Regardless of what a collector may tell you, paying a charge-off doesn't benefit your credit score. A charge-off is derogatory by nature and will appear on your credit report for seven years.
Paying the debt immediately, however, can help you prevent further credit damage. Both collection accounts and judgment records also damage your credit rating. Paying the charge-off prior to its sale to a collection agency or before a lawsuit from your creditor ensures that the charge-off doesn't wreak additional havoc on your credit report and score.
Considerations
If you decide to pay your charge-off, paying it in full rather than requesting a settlement protects you from having to pay taxes on any unpaid balance your creditor subsequently forgives. Doing so also prevents the creditor from selling the remaining debt to a collector. If you cannot afford to pay the charge-off in full and a settlement is necessary, ask for the complete terms of the settlement in writing before you make a payment to ensure the company doesn't later deny knowledge of the settlement and continue trying to collect the debt.
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