What is a charge-off and what should you do if you get one?

A charge-off is an accounting step. After a period of non-payment — typically around 180 days for a credit card, and often sooner for other products — the creditor writes the balance off as a loss on its own books. It is a signal that the creditor no longer expects to be repaid through the normal account relationship. What it is not is forgiveness: you still legally owe the money.

What happens before a charge-off

The path to a charge-off is usually visible in advance. A missed payment triggers a late fee and, after 30 days, a report to the credit bureaus. Further missed payments are reported at 60, 90, 120 and 150 days. Somewhere along the way the creditor may raise the rate, freeze the account or close it to new purchases. Every one of those steps is an opportunity to call the creditor and ask about a hardship program — most large issuers have one, and they are not advertised.

What happens after a charge-off

• The account is reported to the credit bureaus as charged off, one of the more damaging entries on a credit report. It generally remains for around seven years from the original delinquency date, not from the charge-off date.
• The creditor usually either places the account with a third-party collection agency or sells it to a debt buyer. A separate collection account may then appear on your report.
• The debt remains collectible, and the creditor or buyer can sue you if the debt is still within the state statute of limitations.
• Interest and fees may continue to accrue depending on your original agreement and state law.
• If a creditor later cancels or forgives $600 or more of debt, it may issue a Form 1099-C and the forgiven amount can be taxable income. Exceptions exist, including insolvency — check irs.gov or speak to a CPA or enrolled agent.

Your options

Before charge-off: call the creditor and ask directly about a hardship or forbearance program, a reduced-interest repayment plan, or a temporarily lower minimum payment. Creditors are generally far more flexible before an account charges off than after. A nonprofit credit counseling agency can also set up a debt management plan across all your unsecured accounts.

After charge-off: verify the debt with whoever is now collecting it, check the statute of limitations in your state, and consider whether you can negotiate a settlement or a payment plan. Get any settlement in writing before paying, including confirmation of how the account will be reported. Be aware that in many states making a payment on an old debt can restart the statute of limitations, so get advice first.

Check the credit report entry is accurate

One detail is worth checking carefully: the date of first delinquency. That date, not the charge-off date, controls when the entry must be removed from your credit report. If it has been reported incorrectly, the entry could linger longer than the law allows. Get your free reports at annualcreditreport.com and dispute any inaccuracy with the bureau and the furnisher. Also check that a debt is not being reported twice — once by the original creditor and once by a collector — as still owing the full balance.