What is a Charge-off on Credit Reports

Consumer’s that suffer from debt problems may notice some accounts reporting a “charge-off” on a credit report.  There is a lot of confusion on just what this means.  Does it mean the debt is no longer owed?  Can the creditor still pursue it?  And, how long can it be reported?

A charge-off is a designation that the creditor assigns a debt that it believes is no longer collectible.  Creditors have to notify the IRS when it is certain that a loan will not be paid back.  A charge-off occurs at different times depending on the type of loan.  Most credit card accounts are considered charged-off if they have been unpaid for up to 180 days.  After that much time, the creditor will determine that the loan will likely not be paid back and will take that loss on its tax records.

However, that does not mean that the debt goes away.  Just because the creditor doesn’t believe it will get paid does not mean it cannot try.  Collectors may still call and try to collect the debt, and the collector still retains the right to sue in court for the balance within the applicable statute of limitations.

When an account is charged off, it can appear on a credit report in two ways.  First, the creditor can simply report that the account is charged-off.  This is a negative reporting that will be harmful to a credit score.  If the creditor still owns the account and is collecting it, the balance owed may still be reported.  So even though a creditor is telling the IRS its not getting paid, its telling the credit bureaus that you owe a balance.

Sometimes the creditor sells the debt to a debt buyer.  That buyer now owns the debt, and can report to the credit bureaus that it is collecting the balance.  The balance owed on the account will now appear on a new account on your credit report.  The creditor will report that the account is charged-off.  However, the creditor will report the balance is zero because they no longer are owed the balance.  The new account holder will report the balance.  Thus, when an account is charged off, two companies can report the debt at the same time.  One reports that it is currently owed the balance, and the other reports that the account was charged off and sold.

Importantly, the balance that was charged off should not be reported twice.  That is an error on the report that must be corrected.

If you are dealing with an inaccurately reported charge-off, contact SmithMarco, P.C. for a free consultation.

Larry Smith
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