Charge-Off

If an account is charged off do you still have to pay that debt?

Must you pay a debt a creditor places on charge off status?

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Highlights


  • An account charge-off does not remove your obligation to pay the debt.
  • Know your rights under the Fair Debt Collections Practices Act.
  • Never ignore a summons you receive.

Let us define charge-off and other terms before we get to the central issue in your question.

Charge-Off

A charge-off does not mean a debt is forgiven. When a debtor stops paying on a debt, a creditor will attempt to contact the debtor on the telephone and via the mail. When the number of days since the most recent payment reaches 120-180 days, the account is no longer considered current and the creditor is required by generally accepted accounting principles to "write-off" the debt. Writing-off a debt does not mean the debtor is no longer responsible for the debt, or that collection efforts cease.

The write-off date has almost nothing to do with the statute of limitations for debts. To learn more about statutes of limitations, read Which Statute of Limitations Applies to You.

National banks and federal savings associations must follow federal rules and guidelines for charge-offs. Both types of financial institutions must charge-off delinquent installment accounts at 120 days or five missed payments, and credit cards at “180 days past due after seven zero billings” (Allowance for Loan and Lease Losses (PDF), Comptroller of the Currency Administrator of National Banks).

At the write-off point, the creditor will transfer the debt to a late-accounts department, or has the option to sell the debt to a collection agent. The collection agent will buy the debt at a discount. However, the collection agent has the right to collect the entire balance due plus interest.

A charge-off / write-off does not change the legal status of the debt, or change the legal relationship between the creditor and the borrower. However, because the creditor classifies a charged-off debt differently from a current debt, the borrower can often negotiate a settlement for less than the present balance of the debt to after charge off. This would not have been possible when the the creditor considered the debt current.

Charge-Off & Debt Collection

A collection agent may use aggressive tactics to when contacting the debtor. The collection agent may threaten to call the debtor’s employer, file charges with the local sheriff, or say they will park a truck in front of the debtor’s house with a sign that reads "Bad Debt" on it. All of these tactics and many others are illegal under the Fair Debt Collection Practices Act (FDCPA). Start here to learn the rights consumers have in collections under the FDCPA.

A creditor — a debt collector that owns a debt account is a creditor — has several legal means of collecting a debt. But before the creditor can start, the creditor must go to court to receive a judgment. A court (or in some states, a law firm for the plaintiff) is required to notify the debtor of the time and place of the hearing. This notice is called a "summons to appear" or a "summons and complaint." In some jurisdictions, a process server will present the summons personally. In others the sheriff’s deputy will pay a visit with the summons, and in others the notice will appear in the mail. Each jurisdiction has different civil procedure rules regarding proper service of notice. (See Served Summons and Complaint to learn more about this process.)

If you ever receive a summons you should do as it instructs! This is not just a social invitation that you can ignore. In the hearing, the judge will decide if the creditor should be allowed to collect the debt. If the debtor fails to appear, the judge has no choice but to decide on behalf of the creditor.

Therefore, if you receive a summons, the first thing you should do is contact the law firm representing the creditor. Open a negotiation to see if they are willing to settle the debt. If not, it would be wise to respond as indicated in the summons. If there is a hearing, attend it and present your side of the story to the judge. Use facts, tell the truth, dress appropriately, and show the court respect. The court may or may not decide in your favor, but at least you exercised your right to be heard.

The court may decide to grant a judgment to the creditor. A judgment is a declaration by a court that the creditor has the legal right to demand a wage garnishment, a levy on the debtor’s bank accounts, and a lien on the debtor’s property. Which of these tools the creditor will use depends on the circumstances. We discuss each of these remedies below.

Looking for a home loan? Try one of Bills.com’s pre-screened mortgage and refinance partners to find a lender who will give you a great deal in your area.

Wage Garnishment

The most common method used by judgment creditors to enforce judgments is wage garnishment, in which a judgment creditor would contact the debtor’s employer and require the employer to deduct a certain portion of the debtor’s wages each pay period and send the money to the creditor. However, several states, including Texas, Pennsylvania, North Carolina, and South Carolina, do not allow wage garnishment for the enforcement of most judgments. In several other states, such as New Hampshire, wage garnishment is not the "preferred" method of judgment enforcement because, while possible, it is a tedious and time consuming process for creditors. In most states, creditors are allowed to garnish between 10% and 25% of your wages, with the percentage allowed being determined by each state. See Advice on Judgment Garnishment to learn more about wage garnishment.

Levy Bank Accounts

A levy means that the creditor has the right to take whatever money in a debtor’s account and apply the funds to the balance of the judgment. Again, the procedure for levying bank accounts, as well as what amount, if any, a debtor can claim as exempt from the levy, is governed by state law. Many states exempt certain amounts and certain types of funds from bank levies, so a debtor should review his or her state's laws to find if a bank account can be levied. See the Bills.com resource State Consumer Protection Laws and Exemptions for an overview of each state’s rules.

Lien

A lien is an encumbrance — a claim — on a property. For example, if the debtor owns a home, a creditor with a judgment has the right to place a lien on the home, meaning that if the debtor sells or refinance the home, the debtor will be required to pay the judgment out of the proceeds of the sale or refinance. If the amount of the judgment is more than the amount of equity in your home, then the lien may prevent the debtor from selling or refinancing until the debtor can pay off the judgment. Again, every state has its own rules about property liens, so debtors with a judgment against them who own property should review their state’s laws to learn creditor can and cannot do to enforce its judgment. See the Bills.com resource State Consumer Protection Laws and Exemptions for an overview of each state’s rules.

Debt Resolution

If you have a judgment against you, consult with an attorney licensed in your jurisdiction to learn how the judgment will affect you, based on your individual financial circumstances and your local rules.

It is not too late to contact the creditor or the law firm that either represented the creditor or bought the debt, and present them a settlement offer. Even with a judgment in place, the law firm must spend money to try to collect the debt. Getting a wage garnishment, levy, or lien takes time, and time to a law firm is money. The law firm may settle for a lump-sum payment. See "Debt Negotiation and Settlement Advice" before opening negotiations with a creditor. See "What Are My Debt Consolidation Options?" to learn more about your rights and options for resolving the debt.

Important! Get all settlement offers in writing before sending a check to the law firm or collection agent.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

28 Comments

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  • 35x35
    Aug, 2012
    David
    All of my credit card debt has long since been "charged off" (two to three years ago) and now I have some debt buyers and collections folks who have posted them to my credit report. Can I go back to the original credit card holders and settle with them? Will paying the debt buyers off help my credit more than making them prove they own the debt? I'm at the statute of limitations on most of the accounts - haven't been sued, will it benefit my score to pay them even though technically I don't have to? I see lots of advice for people who are just getting into trouble - I've long been in trouble with the credit cards. When the wife and I lost our jobs we paid secured debt only...
    0 Votes

    • 35x35
      Aug, 2012
      Bill
      Charge-off is an accounting term, and does not change the legal relationship between the lender and borrower. Some lenders will move a charged-off account to an internal collections team. Others will hire a collection agent to pursue the borrower on the lender's behalf. Still others will sell a charged-off account to a collection agent.

      Here, we do not know if your collection accounts were sold to collection agents, or if collection agents are working for the original creditors. If the collection accounts were sold, then the original creditors have no rights to accept your payments, or negotiate settlements. If the collection agents are contractors, then it would not hurt to try contacting the original creditors to negotiate a settlement of the debt.
      1 Votes

  • 35x35
    Jul, 2012
    maria
    I have a couple of charge-off on my credit report. I want to start cleaning up my credit if i pay the collections agency will it fix my credit?
    0 Votes

    • 35x35
      Jul, 2012
      Bill
      Depends on the circumstances. If the delinquencies are few in number and six or seven years old, then you will see little to no change in your credit score. If the items are new, then you may see a slight change because of the status change.

      Missing payments or chronic late payments have a large negative impact. Paying a delinquent debt does not undo the damage caused by the delinquency.
      0 Votes

  • 35x35
    Apr, 2012
    kristin
    I purchased an appliance and the store made billing errors (I have written proof of the errors) which they refused to fix and insisted I pay interest on the errors they made. I, in turn, refused to pay the errors they made so they put me in collections. All of this happened in 2007. Since then the store has charged off the debt and I paid income taxes on the charge-off. Now the collection company sent me a summons WITHOUT date or time to appear and they expect me to pay them. I wrote a letter denying all their allegations and they responded with another summons again WITHOUT a date and time to appear but they included copies of the old bills minus the bills where they made the mistakes. What should I do?
    0 Votes

    • 35x35
      Apr, 2012
      Bill
      Are the documents you received actual summons to appear in court, or gussied-up collection letters that have no force of law? Take the letters you received to a lawyer who has experience in civil litigation or consumer law. He or she will tell you in a few seconds if the documents are actual summonses to appear. Explain your situation to the lawyer, and point out the mistakes. A court appearance may be just what you need to make this debt go away
      0 Votes

  • 35x35
    Mar, 2012
    Ty
    I have a collector that's writing off monthly payments and sending me 1099s. Shouldn't I only have to pay interest on the principle portion of each payment? The taxes I have to pay seem to be more than the principle contained within these loan payments.
    0 Votes

    • 35x35
      Mar, 2012
      Bill
      Four questions for you:
      1. Do I understand you correctly when you say a collection agent is sending you monthly 1099 statements?
      2. What is the balance due?
      3. What is the monthly amount due, according to the collection agent?
      4. Are you receiving 1099-A or 1099-C statements?

      The first question is key because only certain entities can issue 1099-As and 1099-Cs. Please name names in your reply.

      0 Votes

  • 35x35
    Mar, 2012
    CATHERINE
    I have a charge off on my crecit report and it shows charge-off for 10 consecutive months on one debt is this normal or should it show for one month and then stop?
    0 Votes

    • 35x35
      Mar, 2012
      Bill
      A debt can be charged off once. Dispute the last nine charge offs.
      0 Votes

  • 35x35
    Aug, 2011
    Elizabeth
    I had a bank account with Wells Fargo but due to inactivity was closed. I had a savings account that was charging me a fee that I was not aware of until recently so I called them today and they validated that my account was indeed closed and they said the monthly savings account fee was now showing as a charge off. Then I was connected to someone else and he told me that I could go to a branch and pay the $13.20 I owed and would be given a receipt if paid in cash. When I asked if this would post to the credit bureaus he assured me it would not. Is that true? Do all charge-offs post automatically and what happens after I pay it? Does it go away automatically? I double check my credit reports and make sure its not there and if there is dispute it with a receipt of payment of the $13.20? I just want to be sure than sorry, especially it was such a small amount. Thank you so much.
    0 Votes

    • 35x35
      Aug, 2011
      Bill
      Does the charge off appear on your credit reports now? If yes, then I doubt your particular charge-off will disappear once paid. If no, then take notes on your conversation with the Wells Fargo representative, pay the fees, and monitor your credit reports to see if this particular charge off appears.
      0 Votes

    • 35x35
      Aug, 2011
      Elizabeth
      If there is nothing on my credit report I don't need to worry about this anymore yes? If that is the case I don't understand why they call it a charge-off. I read your articles on charge-offs/write-offs and it just didn't match up with what I was told by the WF rep. I called back to ask for more details and the rep told me it was a charge-off b/c my account closed on a negative balance. and again assured me it wasn't sold to a third party or was reported to the credit bureaus. I'm going to of course double check my credit report. Thank you so very much.
      0 Votes

    • 35x35
      Aug, 2011
      Bill
      Charge off and write off are accounting terms. A charge off occurs when an organization moves an account from the current-accounts ledger to the bad-debt line on its general ledger. Wells Fargo uses the term slightly differently, but not inconsistently with the definition we provide at Bills.com. The key element in both of our definitions is that the account in question is not current, and is delinquent. A negative balance in a bank account is not desired either by the account holder or the bank.

      Not every charged off account is sold or assigned to a collection agent. Your anecdote is a perfect example of an account the original creditor kept in house.

      Creditors are not required to report positive or negative information to the consumer credit reporting agencies (the credit bureaus). The FCRA states that information provided must be accurate, but it does not have to be comprehensive.
      0 Votes

  • 35x35
    Feb, 2011
    ginger
    As of 12/15/2010 my contract is up on my car I purchased 5 1/2 yrs ago! I owe late fees and interest on the car. The finance company gave me 3 options to pay it. my options were to pay 826.00 a mth for 4 mths and on the 5th month pay the interest of 441.00. my 2nd option was to pay 876.00 a mth for 4 mths and my account would be paid in full or I can take the car and trade it in! I cant afford these options and the finance company isnt willing to negotiate! I have called the finance company and asked for them to come and pick up there car! Do you have any suggestions/advice for me to handle this situation I have put myself in. thank you!
    0 Votes

    • 35x35
      Feb, 2011
      Bill
      Without knowing your debt-to-income ratio or your credit score, I do not have a useful observation. One thought is to refinance your auto loan to stretch out the term. Your long-term interest costs will be much greater, but your monthly payment may be lower. Most banks offer auto refinances, but I do not know enough to guess if you qualify.
      0 Votes

  • 35x35
    Sep, 2010
    Bill
    The credit union can do business with whomever it chooses. If you owe the credit union $300 from an unpaid loan be it one year ago or 20, it may chose to refuse to do business with you today. Charge-off is an accounting concept. Charge-off is not forgiveness. Charge-off is moving an account from current status to non-current status, and the fact that an account is in non-current status does not mean the creditor relinquishes any rights to collect on the debt privately. The fact that the debt no longer appears on your credit report is irrelevant except for the purposes of determining your credit worthiness.
    0 Votes

  • 35x35
    Sep, 2010
    Thay
    approx 16-18 years ago a Fedral Credit Union sued me on a loan as a charge-off. for at least 10 years I have never been sent any info reguarding any form of pay-back or debit collection. most of my family members have seperate accounts at this FCU from loans to checking accounts. including my parents. My parents wrote a check to me personally for my B-day. the bank refused to cash it to give to me because of the charge off 16 years ago. nevermind they have been bought out (changed name) some 4 years back or better. I belive last B-day they honared the check. other than the two recent times i have not used this FCU for over 15 years. should this have been removed from my credit rating and do i still have to pay it off? the loan in question was for $200-$300. as far as i can tell i was not ordered to pay it off or garnished.
    0 Votes

  • 35x35
    Jun, 2010
    Bill
    You are really asking what your chances are of being sued. That is up to the collection agent. A more productive strategy is to negotiate a lump-sum settlement with the collection agent to resolve the debt once and for all.
    0 Votes

  • 35x35
    Jun, 2010
    edward
    hey bill i have a question regarding a charged off loan account. the account is in collections. should i continue to make payments on the account or let it go to a possibility of going to court?
    0 Votes

  • 35x35
    Mar, 2010
    Bill
    Call your county bar association. Ask them for the contact information of the local organization that provides legal services to low- and no-income people in your area. Make an appointment with the pro bono group in that organization, and bring all of the documents you have regarding the debt in question to your meeting with the paralegal or attorney. Take careful notes in your meeting, and act accordingly.
    0 Votes

  • 35x35
    Mar, 2010
    ANita
    I received a summons and I have no money for even filing the court cost, I have written the attorney whose name is on the summons and explained that I do not have a job or money for filing fee, let alone a attorney. The debt is listed on the credit report as a bad debt and listed as nocollectible and worthless to the creditor,I have written a letter to the court and told them I do not even have 33 dollars to file the court cost and I am just not sure what to do, I did not send the letter I wrote and sent a copy of the credit report and a letter I sent to the collection agency in NOv 2009,which I never heard from them till I was served the summons..Please tell me what to do, I have no job I have a husband who is diabiled, I have no money and I am trying everything in my power to save our home..Please help me so I do not make the wrong move...
    0 Votes

  • 35x35
    Feb, 2010
    Bill
    You can get a clearer answer by taking more facts to a California attorney who has experience in consumer law. As I mentioned in my earlier response, the answer to your question is very fact-specific. How much debt did you incur and repay in each state? What does the original contract say and how did the credit card issuer modify it over the life of the account? You provided more information, but the additional facts do not give me enough to offer a meaningful observation. I realize my answer is not satisfying, but I would rather provide a sincere non-answer than simply guess and give you the wrong answer.
    0 Votes

  • 35x35
    Feb, 2010
    anonymous
    Thank you for your prompt response. It didn't clear things up for me but it was good answer.:) The debt was accumulated for some time and paid off in installments monthly in CA up until 2006. In 2006 I moved to NV to live. Stayed there for almost 2 years and about 6 months before leaving NV I went default on the CC that was originally established in CA. I came back to live in CA mid 2007 - never to return to NV again. I do not have a copy of the original card agreement - I don't even know what the original contract stated since the account was opened so long ago. (around 2004) So I wouldn't even be able to provide that info to an atty if needed. How can I get a clear cut answer on this?
    0 Votes

  • 35x35
    Feb, 2010
    Bill
    In law, this is known as a "conflict of laws" question. There is no simple answer to this class of question because each debtor's circumstances are unique, each state's laws handle this question differently, and each credit card contract is unique. I can write a general analysis but, in the end, it will be valueless to you because I would need the dates you were in each location, your residency intent at each location, and your credit card contracts. None of these were included in your message. Therefore, I urge you to consult with an attorney in California who has experience in consumer or contracts law.
    0 Votes

  • 35x35
    Feb, 2010
    anonymous
    Which state SOL am i bound by on credit card debt? I have a cc debt. The account was originally opened and in CA and most of the debt was accumulated there as well. However I went default in NV where I moved for a short period of time. I am now back in CA. I'd like to know is the statute of limitations regarding this debt a CA one or NV? Does it even matter what state I went default in or is the statute based on current residency?
    0 Votes

  • 35x35
    Feb, 2010
    Bill
    Every collection account is different. Some original creditors have reputations for keeping fastidious records and sell fully documented accounts to collection agents. The only way to determine if the collection agent has a fully documented account is to validate the debt. A credit report is not a legal record -- the level of proof required to post information in a credit report is extremely low. Conversely, the level of proof required to validate a debt in a court of law is high. What you are asking is if a creditor fails to validate a debt is that a sufficient level of proof necessary to require the credit bureau to remove a collection account from a credit report. No, it is not because the two have different levels of proof.
    0 Votes

  • 35x35
    Feb, 2010
    Deonna
    How common is it for a credit card company to be able to validate a debt that is over 5 years old (filed on your credit report)as closed/charged off? And there has been no collection agency contact in all that time, or listing on the credit report from any collection agency on that old debt. Is it true some of these companies do not keep these old records after so many years and closed/charge off? If so, would it be a benefit to request the credit card company (original creditor) validate that debt (which there have been no collection company seeking payment for that debt, nor listed on credit report) If the credit card company could not validate the debt within the 30 days of certified mail request, would that have grounds to remove the file from the credit bureau and also knock out any potential collector's on the same account because the original creditor could not validate the debt?
    0 Votes