Charged-off accounts are bills that are written off by a lender as noncollectable. The lender gets a tax write-off for its charge-offs, but the process does not absolve your responsibility for repayment. Debt collectors can still pursue you, and charge-offs and collection accounts get added to your credit bureau records. Paying off charge-offs only helps your credit if you negotiate their removal from your Experian, Equifax and TransUnion credit reports.
Definition
A charge-off is a lender action that usually happens if you refuse to make a payment on a credit card, loan or similar account for at least six months. Your creditor does the charge-off for accounting purposes and tax benefits. Such bills are still legally owed until your state's statute of limitations ends, which means you can no longer be sued for the money. Lenders sell charge-offs to collection agencies to get some revenue from the unpaid accounts. Debt collectors can pursue you as long as they wish, although their right to file a lawsuit ends with the statute of limitations expiration.
Credit Effects
Charge-offs are one of the main reasons credit applications get rejected, according to Bankrate.com. Your original late payments show up on your credit reports, along with the charge-off and the collection agency account if it gets sold to a debt collector. Late payments are bad, but charge-offs represent a total disregard for the debt, which makes you look very risky to other creditors. Charged-off accounts are part of your payment history for credit score calculation. This area makes up 35 percent of your score, so charge-offs are harmful to your creditworthiness.
Solution
Collection agencies focus on getting past-due account holders to pay their bills, so a willingness to send them money gives you bargaining power. The agency pays very little for unpaid accounts, so it is likely to agree to a reduced amount as full payment. Add the stipulation that the collection account gets removed from your credit reports after payment, and get this promise in writing. Negotiate with your original creditor if the bill was never sold to a debt collector. The lender will often agree to a lesser amount as well as to remove the charge-off from your credit reports because it was not expecting to get any money out of the old account.
Confirmation
Get your credit reports a month or two after paying your settlement amount to see if the lender or collection agency upheld its part of the agreement. The credit bureaus offer free reports every 12 months through AnnualCreditReport.com per federal law. Send a copy of the report and your agreement, as well as a demand for removal of the item in question, to the creditor or debt collector if the charge-off or collection account is still in your records. Dispute the item directly with the three bureaus, using the same documentation, if you get no response.
Considerations
Charge-offs lose their effect on your credit over the years if you concentrate on rebuilding a positive history, even if you never pay off the old accounts. Bad debts can only stay on your credit reports for seven years before automatic erasure by the credit bureaus. Focus on paying your current bills on time and spend no more than 30 percent of your credit lines if you want to improve your score but cannot afford to settle charged-off bills.
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