If you've gone through challenging financial times, you may have fallen behind on payments to some of your creditors. As a result, you could see charge-offs listed on your credit reports. Although charge-offs hurt your credit, you can recover from them.
If you stop making payments on a debt, eventually the lender will consider it a “bad debt,” close your account, and charge it off. A charge-off is a debt that a creditor has determined isn’t likely to be paid by the borrower. Most consumer debts are charged off when they remain unpaid for 180 days.
It’s important to understand that if your debt is charged-off, that doesn’t mean you’re off the hook. The creditor may try to collect a charged-off debt, or more likely, turn the debt over to a collection agency.
Charged-off accounts affect your credit reports in several ways. Under the federal Fair Credit Reporting Act, negative information may be reported for the following periods:
- Late payments that led up to the charge-off may appear on your credit reports for up to seven years from the date you were late.
- The charge-off notation may appear on your credit reports for up to seven years plus 180 days from the date you first fell behind with the lender.
- Any subsequent collection account(s) may be reported for seven years plus 180 days from the date you first fell behind with the lender.
Late payments, charge-offs, and collection accounts are all considered seriously negative items on credit reports and can significantly impact credit scores. However, there are steps you can take to rebuild your credit.
Put the Debt Behind You
First, try to resolve the debt. If you continue to owe money on the account, it may be sold by the first collection agency to another. At any point, you may be sued for the balance, up until the statue of limitations runs out. If you can’t pay the full amount, try to negotiate with the collection agency to pay less than the full balance to settle the debt. In many cases, collection agencies purchase debts at a significant discount, and they may be happy to take a smaller payment. If the debt collector agrees, make sure you get the collector to confirm in writing that your payment will settle the debt in full.
Before you offer to pay, check the statute of limitations for the debt. Paying a debt that is outside the statute of limitations may give a debt collector more time to sue.
Paying off the charged-off debt won’t remove the account from your credit reports. Your credit report should be updated to indicate the account has been paid. A paid charged-off account is still considered negative and will continue to impact your credit scores as long as it remains on your reports. However, newer credit scoring models will ignore paid collection accounts, so in that respect paying a collection account that results from a charge-off may help your credit.
It can be difficult to get a charge-off removed from your credit reports, but if you decide to try that approach, you don’t need to spend a lot of money on credit repair. You can try contacting the creditor yourself to see if it will be willing to remove the account in exchange for payment.
After you’ve resolved the debt. Consider disputing information on your credit report that is inaccurate or incomplete. If, for example, you’ve paid off or settled the debt, but your credit report still indicates an outstanding balance, you can dispute it with each credit reporting agency that lists the wrong information. If the information you dispute turns out to be inaccurate, or if it cannot be confirmed, it must be corrected or removed from your credit reports—typically within 30 days.
Focus on the Future
Finally, make sure you have current positive credit references listed on your credit reports. As time goes by, the negative information will carry less weight, and new positive credit references can help to boost your scores. If your credit scores are too low to qualify for a traditional loan or credit card, consider a credit builder loan or a secured credit card.
Keep in mind that if you don’t pay a debt, you may receive a 1099-C tax form reporting that debt to the IRS as “canceled.” Canceled or forgiven debt is generally considered taxable income. You may be able to avoid paying taxes on canceled debt if you qualify for an exclusion or exemption. Still, you generally must file IRS Form 982 to notify the IRS of why you don’t believe that income should be included in your taxable income.