Charged Off As Bad Debt: What Does It Mean?
You’ve probably heard the term “charged off as bad debt” before – but what does it actually mean? And more importantly, what are the implications if this happens to you? Don’t worry, we’re here to break it down in simple terms.Grab a snack, ’cause this is gonna be a long one! But we’ll try to keep things engaging with some wit and personality along the way.
What is a Charge Off?
A charge off is when a creditor, like a credit card company or bank, essentially gives up on collecting the unpaid balance from you. They’ve made numerous attempts to get you to pay, but at some point they decide it’s a lost cause and write it off as a “bad debt” on their books.It doesn’t mean the debt is forgiven or goes away though. Oh no, that debt is still very much yours to deal with. The creditor can continue trying to collect or sell the debt to a third-party collection agency.
-“But why would they give up and charge it off if I still owe?” you ask. Well, it’s mainly for tax and accounting purposes on their end.
How Long Until Debt is Charged Off?
There’s no set timeframe, but generally creditors will charge off debt after it’s been delinquent for 180 days (around 6 months of non-payment). Though policies can vary between different lenders.Once a debt is charged off, it’s reported as such on your credit reports and will remain there for 7 years from the original delinquency date. Yep, it leaves a nice glaring red flag on your credit for potential lenders to see.
The Credit Score Impact
Here’s the bad news: having an account charged off as bad debt is pretty much a nuclear bomb on your credit score. It’s one of the most detrimental things that can appear on a credit report.Credit scoring models like FICO and VantageScore treat charged off debt very negatively. You can expect your score to drop by 100 points or more when that debt is charged off. Ouch.The older the charged off debt is, the less impact it will have over time. But it’s still going to leave a big dent in your score that will make it tough to get approved for loans, credit cards, mortgages, apartments, etc. for several years.
Can You Remove Charge Offs?
In short: it’s extremely difficult to remove legitimate charge offs from your credit reports. The credit bureaus have a responsibility to maintain accurate records, so they won’t just delete negative but correct information.Your best bet is to try sending debt validation letters to challenge the charge off and force the creditor to verify the debt. If they can’t validate it properly, you may be able to get it removed through the credit bureau’s dispute process.But in most cases, you’ll likely have to wait out the 7 year period for the charge off to fall off your reports naturally. In the meantime, work on building your other credit history back up.
Negotiating Charge Offs
Even though the debt has been charged off, you still owe it – and the creditor or debt collector can pursue you. This is where negotiating charge offs can come in handy.Since the debt has already been written off, creditors are sometimes willing to accept a lump sum settlement for a portion of the balance. Say you owed $5,000 but can negotiate it down to paying $2,500 as a settlement. It’s a win-win where you pay less and they get something rather than nothing.Just be sure to get any settlement agreement in writing first before paying a cent. And don’t give creditors access to your bank accounts – issue a check or money order instead.You can also try negotiating “pay for delete” where the creditor agrees to remove the charge off from your credit reports in exchange for paying the settled amount. This can help your scores recover faster.But tread carefully, there are no guarantees with this and some creditors simply won’t comply with pay for delete requests.
-“Negotiating is an art, not a science. It takes skill, patience, and sometimes a little luck.” – Creditor Negotiation Tips from Reddit
The Statute of Limitations
This is a legal concept you’ll want to understand with charged off debt. The statute of limitations sets a time limit on how long a creditor has to successfully sue you for the debt.Once that statute of limitations has passed, the debt is considered “time-barred” and essentially uncollectible through the courts. The creditor can still try to collect, but they can’t take legal action against you over it.Statute of limitation timeframes vary by state and type of debt, but they generally range from 3 to 10 years for most consumer debts. You can look up your state’s laws or check this handy reference for more info.The catch? Any payment you make on that time-barred debt can legally re-set the clock on the statute of limitations. So be very careful about making payments, even small ones, without understanding the implications first.
Bankruptcy and Charge Offs
If you’re drowning in debt with multiple charge offs, bankruptcy may be an option to consider for a fresh start. Both Chapter 7 and Chapter 13 bankruptcies can eliminate or restructure charged off debts you’re unable to pay.The downside is bankruptcy will wreck your credit for years and make it extremely difficult to get approved for any new credit or loans. It can also impact employment opportunities in some cases.But for many, the relief of getting out from under crushing debt burdens outweighs the credit consequences. Just be sure to explore all options and potential alternatives to bankruptcy first.
Dealing With Debt Collectors
Once a debt has been charged off, the account is usually sold to a third-party debt collection agency who will then pursue you aggressively to collect on it. This can involve repeated calls, letters, and even potential lawsuits.It’s important to understand your rights under the Fair Debt Collection Practices Act (FDCPA). Debt collectors cannot harass or abuse you, and there are limits on when and how often they can contact you.You have the right to request debt validation within 30 days of their first contact. The collector must then provide evidence that you actually owe the debt before proceeding with collections.The FTC has a great guide on dealing with debt collectors and what they can and cannot do. Don’t let them bully or intimidate you into paying debts you may not actually owe.
“The calls, the letters, it never stops…but you have rights. Learn them, use them.” – Debt Collection Horror Stories on Reddit
The Tax Implications
When a creditor charges off $600 or more as bad debt, they are required by law to report it to the IRS as potential taxable income for you. You may receive a 1099-C Cancellation of Debt form in the mail.This doesn’t necessarily mean you’ll owe income tax though. There are several exceptions and exclusions that may apply, such as:
- Insolvency exclusion if your total debts exceed your total assets
- Bankruptcy discharge
- Certain student loan debts
- Non-recourse loans (where the lender can only pursue the collateral, not you personally)
Even if you do end up owing taxes on the charged off debt amount, you may qualify for an installment payment plan with the IRS to make it more manageable.Taxes with canceled debts can get complicated quickly though. It’s wise to consult with a qualified tax professional, especially if dealing with large debt amounts. You don’t want to get hit with unexpected taxes you can’t afford.
-Rebuilding After Charge Offs
A charged off debt is a major credit score setback, but it doesn’t have to be permanent. You can start rebuilding your credit right away while waiting for the charge off to fall off your reports eventually.One of the best ways is to open a secured credit card and make all payments on time each month. This will add positive payment history to your reports and help offset the charge off over time.You can also look into alternative credit products like credit builder loans or UltraFICO to get a boost. Just avoid taking on any new debt you can’t afford to pay.The key is to establish new positive credit references and payment histories. It takes time and discipline, but you can absolutely recover from charge offs and get your credit back on track.
“It’s a marathon, not a sprint. Rebuilding credit takes patience and perseverance.” – Credit Advice from Quora
When to Hire a Lawyer
For the most part, you can handle charged off debts and negotiations with collectors on your own. But there are certain situations where hiring an experienced debt settlement lawyer or consumer law attorney may be advisable:
- You’re being sued over the debt
- Collectors are violating debt collection laws
- The debt is extremely old or you dispute owing it
- Bankruptcy is something you’re considering
- The debt amount is very large (over $10,000)
A qualified lawyer can assess your full financial situation and rights, then advise you on the best path forward for dealing with charged off accounts. They can also represent you in court if needed.Just be sure to do your research on any lawyers you’re considering, check their credentials, and understand their fee structures upfront.
-The Bottom Line
Having debt charged off as bad debt is never a good thing for your credit, but it’s also not the end of the world if you take proactive steps to address it. Through negotiation, patience, and smart credit habits, you can recover.The key takeaways:
- Charge offs severely damage your credit scores
- You still owe the debt despite it being “written off”
- Negotiate lump sum settlements if possible
- Understand debt collection laws and your rights
- Explore bankruptcy if you’re overwhelmed by debt
- Focus on rebuilding your credit over time
We know dealing with charged off debts can be stressful and confusing. But you’ve got this! Take it one step at a time, don’t let collectors bully you, and keep working towards getting back on solid financial ground.If you need professional help, there are plenty of reputable credit repair services that can assist with disputing errors, negotiating settlements, and creating a game plan.