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When a consumer becomes severely delinquent on a debt (often at
the point of six months without payment), the creditor may declare
the debt to be a charge-off. It will then be listed as
such on the debtor's credit bureau reports (Equifax lists "R9"
in the "Status" column.) It is one of the worst possible items
to have on your file. The item will include relevant dates, and
the amount of the bad debt.
A charge-off is considered to be "written off as uncollectable."
A major reason for this involves taxes. Every year, corporations
file a Profit And Loss Statement with the Internal Revenue Service.
It is also made available to federal and state regulators, and
to shareholders. All of the year's bad debts (individual charged-off
accounts) are added together as an item in the "Loss" section
of the P & L Statement, and are deducted from the corporation's
tax return, much like other business expenses. To banks, bad debts
and even fraud are simply part of the cost of doing business.
However, the debt is still legally valid, and the creditor can
attempt to collect the full amount. This includes contacts from
internal collections staff, or more likely, an outside collection
agency. If the amount is large (generally over $1500 - $2000),
there is the possibility of a lawsuit.
Paying an old charge-off will not remove it from your
credit reports. It will simply be updated to a "Paid Charge-Off,"
which, while slightly better, is still a seriously derogatory
item.
As per the Fair Credit Reporting Act, a charge-off,
whether paid or not, can remain on a consumer's credit reports
for up to seven years. The time limit is based on the date of
the original delinquency (i.e. when the debtor missed a payment
and never again became current), not the date of the last
activity. Thus, post-charge-off payments should not "re-start
the clock." See our article on Bad Credit
Time Limits for details.
Some debtors may be able to negotiate with the creditor to have
the item removed from the consumer's credit reports in exchange
for partial or full payment. This must be done directly with the
creditor, not with an outside collection agency. The chances
of success may depend on the amount of the debt and settlement
offered, the age of the item, and the particular creditor's policies.
If you attempt this, do everything in writing (keeping copies),
and be sure that the individual you are dealing with has the authority
to grant your request. Remember that your payment is your leverage,
and get a clear, valid, written agreement before you pay. If you
have already paid without a written agreement, then the creditor
will have no motivation to do you any favors.
If you have any charge-offs on your credit reports, your ability
to obtain credit will be seriously impaired, and you must actively
work to rehabilitate your credit.
