You’re in debt, past due and struggling to make a payment. The creditor calls and tells you that if you don’t pay soon, the debt will be charged off. Is it about to get worse, or are things looking bright?
It all depends on your goal. For many of my clients, a charged-off debt is great news. For others, it signals bad times to come.
Here’s the lowdown.
Understanding The Meaning Of A Charged-Off Debt
At any point, a creditor may decide to charge off a debt. All that means is that the creditor makes a declaration that the debt is unlikely to be collected – not that it’s somehow no longer owed. Federal regulations require creditors to charge-off installment loans after 120 days of delinquency, while revolving credit accounts must be charged-off after 180 days.
Once a debt is charged off, it is no longer carried on the creditor’s financial books as an asset of the company. At that point, the debt becomes an expense or a loss to the creditor.
After the debt is charged-off, you still owe the money. It’s an accounting method, and nothing more.
The Credit Reporting Impact Of A Charged-Off Debt
The creditor will report the charged-off debt on your credit report. It’s worse than being simply past due because it indicates that you’re far behind on payments and couldn’t work things out with the creditor within a few months. Your credit score will take a hit, and you’ll need to resolve the account in order to bring your score back up.
The Collection Landscape
Remember, the debt remains collectible after it is charged-off. The creditor will usually sell the debt at this point, however; the amount due is stated as a loss on the accounting records, and the sale of the debt to another company will help balance out some of the losses.
Debt buyers can be a mixed bag, purchasing debt for as little as $0.20 for every $1.00 owed. If you’re in a position to settle a particular debt, doing so after it has been charged-off may give you a better result. You’ll have to deal with the tax implications of debt settlement, but for some situations it makes the most sense.
If you’re not in a position to settle, however, debt buyers can be more prone to scare tactics and potentially abusive behavior. As the account becomes less likely to be collectively, less savory types will buy the debt in the hopes of making a quick buck. Their methodology may be effective, but it’s also more likely to cross the line into illegal debt collection harassment.
Filing Bankruptcy With Charged-Off Debts
Lots of my clients think there’s a difference in their bankruptcy options if their debts have been charged-off. There isn’t. Filing bankruptcy is going to be the same no matter what the status of your unsecured debt may be.
If you’re filing bankruptcy under Chapter 13, however, the fact that your debt has been charged-off and sold to a debt buyer may be cause for extra vigilance. If a debt buyer files a Proof of Claim in order to get paid through your Chapter 13 Plan, they will need to provide proof that you owe the debt as well as the fact that they are the proper people to get paid and the balance is correct. Debt buyers who file Proofs of Claims in Chapter 13 bankruptcy cases often don’t have this information at the ready, which means you may have the ability to object to them getting paid at all in your case.
Half Full Or Half Empty
Whether you’re looking at a charged-off debt as a good thing or not, it’s important to take away a few things:
- you still owe the money even after the account charge off occurs;
- collection will not stop;
- settlement is an option, though there are consequences;
- talking with me is better than going it alone and ending up in a worse situation.
Jay S. Fleischman, the Managing Attorney of our Southern California office, speaks regularly at national events on the subjects of credit, debt, bankruptcy, and consumer protection. 
David B. Shaev, the Managing Attorney of our New York office, has been a bankruptcy lawyer for over 35 years. 
We filed chapter 13 bankruptcy last August in an attempt to save our home and vehicles after some financial hardships. At the time we filed, our vehicle loan was current. Under the chapter 13 plan, we were required to pay our auto loans through the trustee. By January of this year, some things had changed, and our attorney suggested we convert to chapter 7. Upon doing so, we agreed to reaffirm on our auto loans with the agreement to “catch up” our delinquent payments, a result of the trustee, our attorney, and our agreement that a lower payment be made to these creditors until May 2013. This was to ensure that our attorney fees were paid first and other court costs. We received a letter from our creditor’s attorney stating what monies were due to reaffirm that debt. We paid that amount to become current on the loan and reaffirm the debt. When we called the creditor to confirm their receipt of the LARGE payment we made, we were told that our loan was “charged off” as a result of the loan’s delinquent state. The representative said that because they received only $120 each month from the trustee, as opposed to the normal payment amount of $425.95, they HAD to charge off the loan. Is this possible? We were in a legal and binding agreement that this debt would be paid through our trustee…now I’m out $2,000+ from “catching up” the loan and a charged off loan on my credit!! I am confused, sick and frustrated. Please help!
Carrie, it sounds to me as if you need to get with your lawyer to figure out what happened and how the payments in your Chapter 13 bankruptcy were allocated.
If I filed Chapter 7 bankruptcy and that debt was discharged by the bankruptcy court, can the credit card company consider it a “Charge-off” instead of discharged debt? There were no missed payments prior to filing bankruptcy.
If a debt was discharged and never charged off prior to the bankruptcy filing then the proper notation on a credit reporting would be that it was discharged in bankruptcy.