Late payments will eventually lead to account charge off. This term sounds like the debt is going away, but it actually means debt collection efforts will increase. Understanding the process and how you should respond will reduce stress and enable you to address the debt, which can quickly become a nightmare.
What is a Charge Off?
Charge offs typically occur when there has been six months or more with no payments on the account. At that point, from an accounting stand point, the debt is considered uncollectible, resulting in the charge off. Meaning it is no longer considered an asset to the company.
When payments first become delinquent, generally a house collection team (those who provided the credit) will work the account, make calls, and send letters, in an effort to collect the debt. After an account charges off, the company will move the debt to a different in-house debt collection team, or hire a debt collection company to “work” the account, trying to collect.
4 Important Things to Know When You Have Charged Off Debt
- Ensure the debt is reported correctly. A charge off can create duplicate entries on your credit file, which make an already bad situation worse. If the original creditor sends the debt to a third party collection agency, it is common for both parties to report the debt as delinquent, which doubles the impact on your credit score. If a collection company is reporting the debt, the original creditor should report the account as charged off with a zero balance. This prevents double entries for the same debt.
- Know the statute of limitations on the debt. Every state has a statute of limitations (SOL) on how long credit card accounts in default can be sued in court as a collection option. The SOL in most states is from 3 to 6 years. The closer you get to your states SOL the more likely the company will file a lawsuit in order to collect the debt.
- Negotiate when you have the most bargaining power. Debt collection companies are paid when they collect debt, even if it is for less than the full balance. Debt buyers own the debt, where a debt collector just works the account. If a debt collector is unsuccessful the original creditor takes the debt back and lets a different company try to collect. Both types of collection companies are highly motivated to negotiate a payment or settlement to close out the account.
Once a lawsuit is filed, a lot of leverage is lost, because when the debt company wins a lawsuit they are able to obtain a judgement for the full amount of the debt. This is an expensive process so collection agencies would rather settle the debt than take you to court. Your highest point of leverage is before a lawsuit is filed.
- Request removal of the debt from your credit file, rather than just a payoff. Once a debt is charged off, paying off the debt does not automatically take it off your credit report. It will still sit on the credit file for the 7-year period of time, unless you include removal as part of the negotiations.
Charged off debt leads to motivated creditors willing to work with you in order to negotiate the debt and get it off the books. Companies like Strategic Consulting are experts in debt negotiation and are able to stop the collection calls and will aggressively negotiate on your behalf to reach the lowest possible repayment agreement with your creditors.