The charge-off of a debt is not what it may seem. It is an accounting and tax term that does not change your continuing legal obligation to pay the debt. In fact a charge-off is often an indication that you will be pursued more aggressively.
What Is a Charge-Off?
A charge-off of a debt is simply a declaration by the creditor that the debt is a loss on its financial records. The creditor benefits from charging off the debt by being able to post that loss as a deduction from its income, thereby reducing its taxable income and potentially reducing its tax obligation. The debt is charged off as a business expense.
Similarly, a creditor cannot consider a debt owed to it to be an asset if it is not being paid as agreed. So there are rules that dictate when a creditor must charge off a debt, which is generally after 120 days of delinquency for installment loans (such as vehicle loans) and after 180 days for revolving credit (such as credit cards).
So a charge-off is merely an accounting and tax event for the creditor and does not remove your personal liability for the debt.
What Happens to the Debt?
So even if you still legally owe the debt, doesn’t the creditor’s decision to charge off the debt mean that it thinks it can’t collect the debt from me, and so it won’t try to do so at least for a while? Maybe. Sometimes. But more likely it means that either it will move your account to its “bad debt recovery department” for further collection, or will package your debt with other bad debts and sell them at a discount to a collection agency. Either way, there’s a good chance that the write-off will be a signal that you are about to be hit by even more aggressive collections efforts.
What’s the Effect on My Credit Record?
Not good. A write-off is a seriously bad mark on your credit record. Equifax, for example, designates it an “R-9” on their credit reports.
According to the federal Fair Credit Reporting Act charge-offs stay on your record for seven years from the time the debt became delinquent. You can try to settle charge-offs for less than the full balance owed. But even then usually the credit report will continue to list the charge-off, simply changing it from “unpaid” to “settled.”
What Happens to a Charged-Off Debt Long-Term?
The creditor can try to collect on the debt as long as the statute of limitation allows it to. (And creditors have been known to try to collect even after that has expired!) The length of the statute of limitation on any particular debt is often dictated by the laws of the state that the creditor designated in the original loan agreement, although it could be the laws of the state where you reside. That length of time is usually in the range from three to seven years, but in some situations can be indefinite. Assuming that the laws of California apply, the statute of limitations for written contracts, which most installment loans and credit card agreements fall into, is 4 years. Even after the statute of limitations expires a creditor can still file a lawsuit to collect on the debt. The statute of limitations provides a defense that you can use to defend a lawsuit from a creditor with. If you fail to respond to the lawsuit and provide a defense then the creditor may be able to obtain a judgment against you, regardless of the statute of limitations expiring.
A creditor’s charge-off of a debt seldom gives you a break from its collection efforts, and indeed often signals a ramping up of those efforts. It has a significant adverse effect on your credit record, one that is hard to get rid of. And you are at risk of being sued and garnished for quite a few years.
So many of my clients tell me that they just wish that they would have avoided years of anxiety by looking into bankruptcy sooner. A charge-off is a strong indication that you should talk to an attorney about your options, including bankruptcy.