Charged off as bad debt: Here’s what it means

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

If you’ve been behind on payments for a significant period of time, you may see a charge-off on your credit report. In a nutshell, this means your account was charged off as bad debt by the lender because they didn’t believe any further payments would be made.

A charge-off on your account can have damaging effects on your credit and hurt your ability to borrow from lenders in the future. Read on to learn more about charge-offs and steps you can take if you see this negative item on your credit report.

Key takeaways:

• “Charged off as bad debt” means the lender stopped trying to collect the debt and wrote it off as a loss.
• You still have a legal obligation to pay accounts that are charged off as bad debt.
• A charge-off has a negative impact on your credit.
• You can try negotiating a pay for delete agreement with your lender to remove the charge-off from your credit report.

What is a charge-off?

A charge-off is an unpaid debt that the lender wrote off due to failed attempts to collect the debt.  Oftentimes, the debt is sold to a debt collection agency that will continue trying to collect the debt.

A charge-off typically occurs around 120 to 180 days after your account becomes delinquent. If you haven’t made a payment during this time period, the lender may assume you won’t pay back the debt. As a result, the lender will write off the account as bad debt and close the account.

How does a charge-off affect your credit?

Once a lender charges off an account, they will report the status of the debt to the three credit bureaus. A charge-off will negatively affect your credit because it shows that you didn’t meet your financial obligation. This can make it difficult for you to secure a loan in the future, qualify for a lease or even receive a job offer.

Since payment history accounts for 35 percent of your credit score, a charge-off will likely cause your credit score to drop significantly. To give you an idea of the impact, a person’s credit score could drop up to 180 points if they missed a payment by 90 days, according to FICO®.

How long does a charge-off stay on your credit report?

Since a charge-off is a negative item, you can expect it to stay on your credit report for approximately seven years.

It’s important to note that paying a charged-off debt won’t remove it from your credit report. The charge-off will remain on your credit report for the full seven years, but will be reflected as paid. This looks better to future lenders, although it likely won’t improve your credit.

Is a charge-off worse than collections?

A charge-off is generally considered worse than collections because it’s more difficult to negotiate to get it taken off your credit report.

Next steps to take if you have a charge-off

If you notice a charge-off on your account, consider taking the following steps to ensure it’s accurate:

• Request the details. Collect the details of the account, such as who owns the account, how much you owe and how long ago the debt was incurred.
• Verify the account is actually yours. If you don’t recognize the account or don’t believe it to be yours, you can send a debt validation letter to the collection agency.
• Check for errors. If you believe you already paid the debt, refer to your payment records to ensure no errors occurred.

Should you pay a debt that has been charged off?

You still have a legal obligation to pay the debt. In fact, the creditor can file a lawsuit against you for a debt was charged off within the statute of limitations, which varies by state and typically ranges from two to 10 years. If the statute of limitations  expired, the creditor cannot sue you for the debt, although they may still try to collect it.

How to remove charge-offs from your credit report

If you’ve determined that a charge-off on your credit report is inaccurate, you can dispute it. Write a letter to the credit bureaus explaining why the information is incorrect and request to have the charge-off removed.

If the charge-off is accurate, you can try to negotiate a pay for delete agreement. This involves paying a portion or all of the debt you owe in exchange for the lender removing the charge-off from your account. Keep in mind that there are no guarantees the lender will agree to negotiate or enter into an agreement.

If neither of these options is successful in getting the charge-off removed from your report, you can just wait the seven years for the item to fall off of your report

How to prevent charge-offs in the future

To remain in good standing with creditors, it’s best to prevent your accounts from moving to a charged off status in the first place. Below are some tips to ensure you can pay off your debt in a timely manner:

• Prepare an emergency fund. Oftentimes, an unexpected bill can cause you to fall behind on your payments. Creating a savings fund with three to six months’ worth of expenses can help you cover bills in the event of an emergency.
• Put together a budget. Create a budget that accounts for all of your monthly expenses to ensure you have enough money to pay your bills on time.
• Create a payment plan. If you foresee an issue with paying a bill in the future, reach out to your lender to work out a payment plan. Most lenders prefer this scenario over not receiving a payment at all.

If you believe the charge-off on your account is inaccurate, you may be able to dispute it. Learn more about our services and how we can help you address inaccurate negative items on your credit report.

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