How a Credit Account Charge-Off Works: Nonpayment of Credit Card Bills Can Result in Debt Being Charged Off

When a credit card company charges off a debt, it allows the company to write off the unpaid debt as a tax loss. After this occurs, a consumer can no longer attempt to make payments to the original creditor for the debt. When this occurs, your credit score can drop. The best way to avoid a charge off would be by transferring your debt to another credit card that will accept a balance transfer. As long as you have 0% interest rate for the first sixty days of account opening, this can give you breathing room to adjust your finances. The Time Limit for Charge-Offs Most credit card companies will not hold an unpaid debt any longer tha 180 days. The 180 day mark is when the statute of limitations for debt collection begins in all 50 states (See The Statute of Limitations for Debt Collection). A credit card company cannot hold an unpaid debt indefinitely. Doing so would be financially unwise, thus charge-offs occur so that the company may write off the debt as a tax loss and sell the remaining balance. The Original Creditor Will Sell the Debt to a Collection Agency After the account is charged off, the original creditor will then sell the debt to a third party collection agency. The collection agency then owns the debt and will contact the consumer in an attempt to collect. The Fair Debt Collection Practices Act permits a collection agency to contact a debtor’s family or employer in an effort to locate the consumer, but not for any debt collection efforts beyond initial contact. If a debt is high enough, collection agencies will sometimes attempt to sue consumers. For this to take place, the debtor must be sent a summons and given an opportunity to appear in court and defend himself. In the event that the debtor neglects to appear, the collection agency will be awarded a default judgment and can proceed to wage garnishment in states where wage garnishment is legal for unsecured debts (See The Wage Garnishment Process and Collections). The Effects of a Charge-Off on a Credit Rating Once a credit account is charged off, the account will update as such on the consumer’s credit report. A charge-off will remain on a consumer’s credit file for 7 years after the day the account first went 180 days delinquent, usually, but not always, the same date of the charge-off (See The Federal Reporting Period for Bad Debts). In addition, once the defaulted credit card account is purchased by a debt collector, the debt collector will often insert a trade line into the consumer’s credit file identifying itself as the new owner of the account. A collection agency trade line is always considered negative and its very presence on a credit report will result in an individual’s credit score dropping. The collection account will remain on the consumer’s credit file for the same amount of time as the charge off. Because the debt itself is the same, a collection account must be removed at the same time as the original creditor’s trade line - no matter when it was inserted.