What is a charge-off?
A charge-off is when a bank writes delinquent debt off its books. The term can be used in conjunction with various types of debt, such as that originating from a credit card, mortgage, auto loan, etc.
Banks are legally required to charge-off debt when it reaches a certain level of delinquency, which varies by the type of debt. For example, credit card debt must be charged-off when 180 days delinquent, while a personal loan must only be 120 days past due. Debt is also charged-off when the debt holder passes away or files for bankruptcy.
What happens to charged-off debt?
Debt does not simply disappear when it is charged-off, but rather continues to be relevant to a bank’s taxes and is counted against the bank’s reserve funds as a loss. What’s more, banks continue collection efforts past the time of debt being charged-off. Such debt collections efforts might be handled directly by the bank, but it’s more likely that a debt collection agency will buy the charged-off debt and attempt to collect on the amount owed itself.
Charged-off debt can cause confusion. Charged-off debt is often passed between debt collection agencies, resulting in multiple organizations contacting you for payment. In addition, many consumers believe a greater difference to exist than is truly the case between charged-off debt and debt that is severely delinquent. As a result, they often assume that they’re no longer responsible for payment.
Charged-off debt and liability
The fact that you are legally liable to pay back the money that you owe does not change as a result of a charge-off. Whether debt is charged-off or not, you are liable for 3-15 years from the time of last payment. The exact length of time depends on your state’s statute of limitations for debt.
When debt is charged-off as a result of a loved one passing away, you are not automatically liable simply because you are related either. Whether you are legally-bound to pay money owed by a deceased relative depends on your involvement with the account in question. If you were a co-signer, you’re liable. If you weren't, debt collectors must wait until the estate is settled to receive payment. Should the leftover funds (if there are any) be insufficient to cover the entirety of the debt, whatever remains is then written-off.
Charged-off debt and credit reports
A great deal of uncertainty also exists around the relationship between charged-off debt and credit reports and scores. As you expect, the more delinquent you are on your obligations, the greater the negative effect on your credit standing will be. A charge-off causes the most damage because it represents the peak of delinquency. After charging-off on a loan or line of credit, no further damage can be done. There is only room for improvement. Improvement can occur in one of two ways: payment in full or partial payment that satisfies your debt collector (i.e. debt settlement).
What’s more, a charge-off remains on your major credit reports for seven and a half years following the point of first delinquency. Some people believe (or are led to believe by debt collectors) that when they make a payment toward debt or debt changes hands between collection companies, this length of time resets. However, nothing can change the length of time negative information remains on a credit report, unless the information is listed in error.