A charge-off is an unpaid debt that the financial institution has deemed not collectible. It then writes this debt off and it is considered income on their taxes as the cost of doing business. While the company may have said the debt is not collectible that does not mean the debt no longer exists. These companies have many options to either collect the money or negatively reflect on your credit report.
Checking and Savings Accounts
Personal checking and savings accounts may become overdrawn by spending more than what is available in the account. Banks will cover these charges in some cases. If the accounts remain overdrawn for a period of time the account may be closed and the dollar amount is charged off. Opening new checking or savings accounts may be difficult as many financial institutions use Chex Systems which is a reporting system for unpaid overdrawn accounts. Financial institutions may refuse to open an account or limit you to opening saving accounts only depending on the situation, dollar amount involved and if the funds have been paid back.
Collections
Just because a debt has been charged off does not mean that the debt is no longer owed. Many financial institutions will sell the debt to collection agencies after the debt has been charged off. While the financial institution will stop charging interest and fees when this happens, the collection agency may add their own fees on to this debt. Collection agencies must follow the Federal Fair Debt Collection Practices Act established by the FTC. Collection of debts also have a statute of limitations where the debt may legally be collected which ranges from three to six years depending on local, state and federal guidelines.
Judgments
If the charged off debt is large, a financial institution may also take the step of filing a judgment against you. The institution sues you for the amount owed and if they will the suit, the court acknowledges the debt and orders you to pay. There are no statute of limitations on a judgment. The judgment can attach to your home as a lien. This can make selling or refinancing your home difficult as the lender may require the judgment be paid prior to completing the transaction.
Effects on Credit
Charged off accounts can be shown on your credit report. The institution the debt was originally owed to can reflect the account as charged off. The collection agency trying to collect the debt may show the collection on the report also. These will have a negative impact on your credit score affecting whether you are approved for financing in the future and at what rate you obtain.
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