Advice on Charge Offs and Settlement

Are charge-offs when a creditor wants to settle the debt by offering me to pay half the debt?

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Bill's Answer: Bills.com Resident Expert

“Charge off” is an accounting term used by creditors, meaning that a creditor has transferred an account from its “accounts receivable” ledger to its “bad debt” line on its general ledger. Credit issuers are required to do this by the federal Office of the Comptroller of Currency, in an attempt to prevent banks from inflating future earnings statements with old and defaulted accounts. For the consumer, the only real consequence of an account charging off is that the account will report as a negative item (R9) on the consumers’ credit reports.

Charge off does not mean the consumer no longer owes the debt. Charge off does not change the legal status of the debt. Despite what it sounds like, an account being charged off does not forgive the consumer for liability for the debt in question. Creditors can continue their collection efforts to secure payment on charged off accounts. Creditors may continue to charge interest on charged-off accounts. Settling an account with a creditor will not result in the account being charged off. In all likelihood, if the creditor is offering to settle, the account has already been charged off due to its delinquency.

Quick Tip: If you need help with settling old accounts, get a no-cost Debt Settlement Savings Quote.

Credit Score & Delinquent Debt

Resolving the charged off account appearing on your credit report should have a positive impact on your credit rating. The past delinquency will not be removed from your credit report, but it should reflect a $0 balance on this debt. While the past delinquency and charge off will continue to negatively impact your credit rating, the impact should be much less if you pay the outstanding balance. Resolving this account should remove an outstanding balance from your credit profile, and it will reduce your “debt to available credit ratio,” which should also have a positive impact on your credit rating.

Because I do not know the other details of your credit history, I cannot tell you how much resolving this debt will improve your credit score—the increase in your credit rating may be quite large or very small depending on how many other accounts and other factors are currently being reported on your credit file. For more information about credit, credit reports, and credit scoring, I encourage you to visit the Bills.com Credit page.

Negotiating a Debt Settlement

You may have noticed that I have used the word “resolve” rather than “pay” thus far in responding to your question. The reason I do not like to speak of “paying off” the account is that it implies paying the full balance of the debt. As you have already seen, many creditors will agree to reduced balance settlements on delinquent accounts such as yours. For example, if you contact the creditor and explain that you would like to settle this account, the creditor may be willing to accept a reduced-rate settlement to fully resolve your outstanding debt. In many cases, I have seen creditors accept as little as 30% to 50% of the balance owed to resolve the outstanding debt. Generally speaking, creditors will require any settlement offer to be paid in a single, lump sum payment, though some creditors may allow you to pay a settlement over the course of a few months.

If you are able to negotiate a settlement with the creditor, I strongly encourage you to obtain a written settlement offer from the creditor prior to tendering payment. If you choose to settle this account, your credit reports may list an account status of “settled in full,” “settled as agreed,” or “settled for less than full balance.” These account statuses are not considered as positive as a “paid in full” status, but the difference is generally negligible, especially considering the amount of money you may be able to save by settling the debt.

If you would like to read more about debt, and the options available to consumers who are struggling to pay their bills, I encourage you to visit the Bills.com Debt Help page.

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

Best,

Bill

Bills.com

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Comments (63)


Sue R.
Signal Hill, CA  |  April 06, 2012
I had a Cap 1 account that was current when I received correspondence from them, telling me I did not have to pay the debt if I didn't want to and it would be written off. The next month I didn't pay and they wrote it off. I checked my credit report 2 years later, and they reported it as a "settled for less than the full balance", a key derogatory. Recently, I paid the balance due, not because I legally had to, but because I wanted my creditors to see I paid my bills in full. If I had known it would be a key derogatory, I wouldn't have accepted the settlement. They haven't reported my new status (account paid in full) yet, and when I called the dispute department, the lady was confused and said she had to research this, as I have no late payments before this settlement. Usually, they don't report "paid chargeoff" unless it's been late at least 120 days. Does anyone have any advice as how this should be reported? I'm trying to get it reported as "Paid in full" or deleted entirely. Any advice is appreciated.
Bills.com
April 06, 2012
Your best bet is to continue to work with Capital One to set an accurate status for this account. Readers? We welcome your constructive ideas.
Bailey W.
Rockleigh, NJ  |  March 31, 2012
Debt was originally Citibank credit card. I have been unemployed for 3 years and made minimum payments until May 2011 at which point Citi doubled the minimum and would not negotiate. In Oct/11 I recd notification from Citi that it would go to collection by Nov 9 but when I called to make arrangements for payment on Nov 7 they had already sent it to collections. And thus the games ensued...CA has sent a summons, there is a charge off on my CR in the name of Citi. Summons says that CA is acting for Citi but I'm inclined to believe that this debt has been sold. I requested debt validation and as of yesterday received photocopies of my Citi bills. Does this confirm that Citi still owns the debt or should dig deeper?? Thanks
Bills.com
April 01, 2012
If you have received a summons, and the collection agency has sent proof of the debt, then you should be prepared to either immediately negotiate a settlement or go to court.
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Bailey W.
Rockleigh, NJ  |  April 02, 2012
Perhaps I should elaborate. CA/law firm is Cohen and Slamowitz and they seem to have quite a reputation for their unethical tactics. (and pending class actions against them) The process server perjured himself on the Affidavit of Service, left the summons in the snow on my driveway, dollar amount on summons does not match statements and recently another CA has started calling. I would hate to make arrangements to settle with the wrong CA. Thanks for your help.
Bills.com
April 02, 2012
The legal process works fairly when everyone plays by the rules. When a consumer faces a collection agent that may or may not be playing fairly, it is time to level the playing field. Consult with a lawyer who has consumer law experience. This has four advantages:
  1. You will know your rights and liabilities under state and federal law
  2. Your advocate will fights for your rights against an opponent that may not be following the rules.
  3. Your opponent will know it cannot bully you.
  4. If your opponent does not follow the rules, your lawyer knows what steps you can take to get the appropriate sanctions.

My advice? Consult with a lawyer immediately.

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Sam G.
April 15, 2012
Bailey, check the rules, if it is not proper service then go for motion to dismiss with reason of not proper service and then try to settle with them
Dennis H.
Escondido, CA  |  January 13, 2012
I am in the final funding stage of a refinance. The day of signing, Capital One places a carge-off onto my credit reports for about $10,000. Until then, there were no Capital One reports to any of the credit bureaus. There had been attempts by colleciton agencies over the past 2 years, but they were never able to respond to my request for validation of the claim. I called Cap One, and they said they report every 30 days, which cannot be true in this case. One of the credit reporting agencies is showing satisfactory until today, indicating a sudden charge off out of the blue. While I had an account with them years ago, they have not reported as is showing on the current report, not provided a demand, and if they hired collection agencies, they were not able to validate the debt. I have copies of my credit reports for the past several years. How can they just suddely show up and give the impression they had been reporting OK for years when they had not reported at all, then charge off for years when they had not?
Bills.com
January 13, 2012
What is the date of first delinquency on the Capitol One account in question? If it is more than 7½ years ago, then it may not report this derogatory on your credit report.

You imply that Capitol One, the original creditor, placed the derogatory on your report. If it is a collection agent, then validate the debt. If Capitol One is the original creditor and is reporting the debt, then your only option is to negotiate a lump sum settlement.
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Dennis H.
Escondido, CA  |  January 13, 2012
Thanks for your reply. Cap One is the original creditor, researching date of first delinquency. Probably between 4 and 7 years ago, so, outside the CA SOL, but under the 7.5 year credit reporting date. There were NO Cap One accounts on my credit reports until literally yesterday when this suddenly showed up. They put into the report that the account was OK for each month for the past 2 years, when in fact, they had not done ANY reporting at all. Can they do this? Interestingly, there has been no demand letter at all from Cap One, just a series of collection agents who cannot validate the debt.
Bills.com
January 15, 2012
If I understand correctly, you had an account with Cap One, that was not paid off, but whose delinquency occurred more than 4 years ago. You made a smart move with collection agencies by demanding they validate the debt. It appears Capitol One either purchased your collection account, which it sold to collection agents, or it hired contractors to collect the debt, but gave up on that tactic. It is unusual for a creditor to report an account today it failed to report as delinquent yesterday, but there is nothing illegal I can see what you described. A creditor must make accurate reports to the credit reporting agencies. If the report of the derogatory account is accurate, then you do not have recourse other than negotiating a settlement.
Rachael B.
City Of Milford, CT  |  October 28, 2011
My credit report has a listing from Capital One for a debt that was "Legally paid in full for less than the full balance" and lists $530. I am applying for a mortgage in the near future and my score is on the cusp of risk and medium. Would it be possible to call/write to them saying "I'll pay the remainder for a deletion?" Is there any other way to get this taken off?
Bills.com
October 28, 2011
If you pay in full, then the creditor would change the status. However, it sounds like the file has already been closed. Concentrate now on improving your score. If you are making your payments on time, then the old collection account will probably not severely damage your score.
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Sara R.
South Riding, VA  |  February 15, 2012
So, are you saying that it is possible to ask for a PFD after already paying according to the settlement for less than the full balance? I settled for less on an old HSBC acct that was charged-off, before I even knew what a PFD was. I have been send HSBC GW letters, but they won't update the account status as paid. (It's currently being reported as charged-off with a 0 balance and settled for less than full balance.) I am tempted to call them and ask if they would consider taking the remainder of the balance in exchange for a deletion. Is this done frequently? Or am I crazy? My fear is that they're going to think I am trying to bribe them or something...
Bills.com
February 16, 2012
The creditor is legally obligated to accurately report your activities. Negative activity falls off your report 7 years after the first date of delinquency.
Marc F.
Quincy, MA  |  October 14, 2011
I know people who negotiated 50% off "charge off" payment but in the end the company still made quite a profit considering the outrageous fees which were added on to the bill.
Jackie M.
San Antonio, TX  |  September 26, 2011
I am 22yrs old. I made many irresponsible decisions when I was younger I currently have 3 negative accounts on my CR, 2 cards one of which has been closed and a less than desirable Credit Score. My goal by the end of the year is to be debt free except for my student loans. I have a credit card that was charged off with a balance of approx $4,500. I called the collections company and have been making monthly payments but I am going to try to make settlement and "pay-to-delete" agreement with them within the next month. With my other CC I have been on time on my payments and am close to paying off the balance. Now with the other two negative accounts that are on my CR (which were less than $100 each) I called each collections company and paid the amounts in full. I paid for each amount without realizing that the negative information would stay on my CR. My credit score currently is inhibiting my from moving forward in my life so my question to you is. What is your advice on my current situation? Should I attempt to make a settlement with the Charged off CC company or should I pay the balance in full? Is there any way to request for negative information to be taken off my account after it has been paid in full? I have learned to manage my money well at this point while trying to clean up my past mistakes. My biggest goal is to get a new car and be able to buy a house after I graduate which is approaching quickly. I just don't want my previous mistakes to haunt me when I try to make a future for myself. Thank you for your input.
Bills.com
September 26, 2011
See the Bills.com resource Pay For Delete to learn more about dealing with your credit report.

There is no financial or credit score benefit for you to pay the entire amount due on a delinquent debt. See the Bills.com resource Negotiating Debt to learn how to resolve your debt for less than the balance due.
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Jackie M.
San Antonio, TX  |  September 26, 2011
Thank you for your response. What about the negative information that is shown as "Paid" on my CR. Is there anyway to request to have that taken off?
Bills.com
September 26, 2011
I have read that some consumers in your situation will ask a creditor to remove a derogatory but resolved entry on a credit report for "goodwill" purposes. You have no reason not to ask for such a gesture.
Adrienne T.
Alameda, CA  |  September 24, 2011
This year, I stopped paying all my credit cards and my second mortgage after losing essentially all my money in real estate. Due to my truly pathetic financial situation, and the fact that I started the process toward Chapter 7 bankruptcy, a couple of the credit collections agencies called and offered me very low settlement offers. I started doing this and with family help and have now settled 5 of 7 credit cards and my second mortgage for 10-20% of full balance. My question is the last two credit cards are not being as cooperative. Capitol One wants 80% to settle with some words indicating that 60% MIGHT do it. That is just too much for me. I can't get that much. Wells Fargo just has not charged off my account yet, so I can't deal with them yet, but they seem a little sticky, too. So how does Capital One usually work. Can you get them to 15%??? All the other major credit cards did. What do I have to do to convince Capital One? Thanks.
Bills.com
September 24, 2011
A settlement is a negotiation between two parties. There is nothing that you can do to compel Capitol One to settle for a low percentage. What you can try to do is to impress upon them the degree of your financial hardship, giving as much detail as you can to prove your inability to pay.
Ann J.
El Mirage, CA  |  May 27, 2011
I have several accounts that were settled through an attorney over a year ago. One of the accounts is listed as "Paid in Full" but every month I am getting another non-payment Collection ding on the account. The other is stating it is a charge off even though it was settled over a year ago. Any ideas on how I can get these resolved?
Bills.com
May 27, 2011
Send a copy of your settlement agreement or proof of payment to the offending collection agents, along with a cease communication letter.
Karyn S.
Narragansett, RI  |  May 15, 2011
I sold my house thru a short sale in October of 2010. We started in higher when we originally put the house on the market, and they we needed to lower the price to be more competitive with the market. I still made my monthly payments on time. I recently checked my credit report, and noticed that the mortgage company reported to the credit bureau "settled for less than full balance." I am currently paying a promissory note in the amount of $18,500, which is not noted on this report. So if I pay off the note, would the report still show "settled for less than full balance?" Shouldn't the mortgage company have reported "paid in full and show a zero balance?" This does not make sense!! I spoke to a loan officer at a local bank who is willing to give me a loan, and he advised that the mortgage company is reporting false information to the credit bureau. When we had a conference call with the mortgage company, the supervisor was clueless and didn’t want to help. She advised that I can dispute this with their legal team. There is no point of contact, and no telephone number to their legal department. Just a fax number to submit your issue. Do you know how I can dispute my case?
Bills.com
May 15, 2011
See the Bills.com resource Credit Report Dispute to learn the steps to dispute an error on a credit report.
Daniel N.
Bloomington, MN  |  April 19, 2011
I had an American Express Credit card charged off by AMEX. They sold it to a collection agency and I think it has changed hands once or twice between other collection agencies. It finally reached the one I am dealing with now. They served me and filed a lawsuit for the money I owe. I called them and worked out a settlement. $4500 for a $5700 debt. I still have one payment left to make. Should I pay off the balance in full or is it better to just make the last payment and fulfill the settlement?
Bills.com
April 19, 2011
From a credit report perspective, the damage is done and there is no benefit for you to pay the entire balance. From a legal perspective, you and the collection agent reached a settlement agreement, so there is no benefit to you to pay more than agreed. If American Express sold your collection account to this or another collection agent, then it is never going to see your settlement money, so there is no benefit to American Express for paying more than you agreed. The only party that will benefit if you pay more than the settlement agreement is the collection agent. If the extra $1,200 is burning a hole in your pocket, then invest it in a mutual fund or IRA.
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Daniel N.
Bloomington, MN  |  April 19, 2011
Thank you so much for the help!
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