Pay off charged off debt

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Focusing on credit scores and what consumers can do to improve them

You finally did it. You eliminated the debt that has hung over your head like a gathering storm for the past several months. Those unpleasant collector phone calls? They’ll soon be a distant memory.

But is the debt really gone? You need to find out for sure.

A few months go by and, with renewed confidence, you apply for a home loan. One day your prospective lender calls you to deliver the bad new news — your credit report still shows an unpaid debt. “Sorry,9rdquo; he says, “but we can’t offer you a loan at this time.” Someone else is going to get that great house you had your heart set on simply because your credit report contains outdated information.

What happened? Weren’t you out of the woods when you made the payment? Not necessarily.

What is a charge-off, and how do you get rid of it?

Few of us ever want to be guilty of not paying a debt, but in some cases it’s hard to avoid. A sudden layoff or a medical emergency can quickly render you unable to pay credit card bills or other debts on time. Regardless of the reason, a debt that goes unpaid for a lengthy amount of time ultimately becomes a charge-off.

“Charge-off9rdquo; is an accounting term for an unpaid debt that a bank or credit card issuer removes from its books. Typically, a creditor will either sell a debt that is more than 180 days overdue to a collection agency or employ an agency to help collect payment. Missed payments are especially damaging to your credit score, but paying a charge-off in full can help it recover more quickly over time.

“The past due status that was reported when it occurred will remain on the report for seven years per Fair Credit Reporting Act requirements,” Kristine Snyder, senior public relations manager at Experian, said. “Because of the paid status, it will count less and the impact will lessen as time goes by.”

Improving your credit score, however, should not be your primary goal in paying off an old debt. Marty Lynch, compliance manager and director of education at Cambridge Credit Counseling Corp., said the immediate value is your improved perception as a potential borrower in the eyes of prospective lenders.

“That kind of perception is probably more significant than any kind of movement in your score,” Lynch said.

While there are other options for dealing with a charge-off, paying it in full is the best first step on the road to recovery.

Unfortunately, it’s not enough to just pay the charge-off and forget about it. There are some cases in which the information about the full payment doesn’t get communicated to the credit reporting agencies. Todd Christensen, director of education at the National Financial Education Center, said that while most creditors report payments on charge-offs, there are occasions when they don’t.

The idea that creditors don’t always update charge-offs to “paid in full” on credit reports can be unsettling to consumers, but the federal government is on the case. The Fair Credit Reporting Act requires entities that regularly furnish information to consumer reporting agencies to promptly update incomplete or inaccurate information. The Consumer Financial Protection Bureau said in a March report it had found some instances of furnishers not updating reporting agencies on paid-in-full charge-offs and instructed them to do so.

What to do after paying down a charge-off

You can’t control the actions of a bank or a collection agency, but there are steps you can take to safeguard yourself from lingering problems after you’ve paid off a debt in collections.

  • Check your credit report. Request a copy of your credit report from one of the major credit bureaus about a month or two after paying in full to ensure the balance has been updated to zero. Consumers are entitled to one free credit report per year, and they can be obtained at AnnualCreditReport.com.
  • If the charge-off is still there, file a dispute. If the credit report continues to show a balance, the consumer should initiate a dispute with the credit bureau that shows the error, Christensen said.
  • Be able to prove that you paid. Lynch strongly recommends holding on to the first statement that shows you paid off your balance. Or, be sure to have access to a copy of the payment made, either through your bank or a canceled check. “You want to make copies of that and keep them in a safe place,” he said. “Proof that a balance is paid to zero is gold.”
  • Bring your most recent credit report when applying for a loan. You can save yourself a great deal of pain by allowing a prospective lender to glance at your credit report before you even apply for the loan. The lender can then let you know the likelihood of getting the loan based on what’s in your report. “If I have only recently paid off a collector, I want to point out that while I have some past credit issues, I have also taken care of them,” Lynch said.

There are also preventive measures that can be taken to head off any further action on a debt that is in the process of being paid. Christensen recommends requesting from the creditor a statement that it will no longer attempt to collect on the account or turn it over to a collection agency. Although not typical, a debtor can be in for surprises after a collection agency has assumed a debt.

“I have heard of consumers paying what they thought was the full balance only to find that there were additional fees that the collection agency had added, leaving an additional balance,” Christensen said. “To guard against the bad apples in the collection industry, documentation is always a good idea.”

Should You Pay a Charged Off Debt?

Q: Should I settle in full on an account that has already been closed or charged off? Or should I demand a paid in full receipt once we have a negotiated amount?

A: Without knowing the specific type of debt involved, what state you’re in, and how old the debt is, it’s hard for me to give you definitive advice. However, if I were in your shoes I probably would not agree to pay a charged off debt at all – unless I desperately wanted to clean up my credit, and there was an upfront, written agreement to have all negative information about the charged off account removed from my credit reports.

And, yes, getting a receipt would absolutely have to be included in any deal, regardless of whether my payment was a partial one or one that paid the balance in full.

Here are some insights to take into consideration when it comes to paying charged off debts.

A debt that has been charged off has been “written off” by the original creditor as “uncollectable.” So when a company charges off a debt, the business gets a tax break for this loss.

After a charge off, most companies will not try to pursue further collection from a consumer. But some do. Also, some companies may sell old debts to collection agents.

Unfortunately, there are no universal practices and it is not cut-and-dried about whether a consumer is still liable/legally on the hook to pay a debt that has been charged off.

I actually did quite a bit of research into this topic recently because a few of my coaching clients were facing dilemmas about what to do about very, very old charged off debts. As mentioned the age of your debts nor do I know the state where you reside. Nonetheless, I will tell you, in summary, what I told them.

In a nutshell, there is a lot of contrarian advice out there. Some experts state emphatically that you still owe an old debt, even if it’s been charged off. The charge-off, they note, is mainly for the creditor’s benefit. But it does not remove your legal liability. Therefore, they suggest you pay the debt.

Other experts (myself included) note that there is a statute of limitations in every state that governs old debts. And so it’s not always so clear-cut about whether a consumer still legally owes an old debt. It really depends on how old the debt is, the type of debt was involved, and even where you live or where the creditor is based.

In the State of New York, for example, the statute of limitations on credit card debt is generally 6 years. However, there are two big exceptions to this:

  1. The statute of limitations on a department store card is 4 years.
  2. The statute of limitations on other national credit cards (like those issued by Chase, Bank of America, or Discover) is 3 years. Read here to learn what the New York-based consumer advocacy group called NEDAP/New Economy Project has to say about this topic.

(Also, for more background info, here’s another article I wrote about the statute of limitations, with an explanation on how to use it to eliminate old debts).

But if you’re worried about what a debt collector can do to you, here are some insights that may help. I’m not a lawyer, so I asked attorney Jacqueline McMickens of Brooklyn, New York, for her views on this matter. She stated that many people are paying old debts that they are no longer legally responsible for paying, including ancient, charged off debts.

Lawyers from NOLO also state that creditors can’t sue you once the statute of limitations has passed.

Here is an article from NOLO on when collectors can NOT sue you over old debts.

Pay attention to the section of this article that contains the sub-heading: “Using the Statute of Limitations.” It highlights how, even after you are not legally responsible for a debt, some collectors will still try to squeeze money out of you — so-called “voluntary” payments. In other words, they can still ask. They just can’t sue, or even threaten to sue.

From a legal perspective, once the statute of limitations expires, there is nothing that a creditor/collection agent can lawfully do to make you pay them any money.

Can they still report you to the credit bureaus? Yes; negative information about your payment history can stay on your credit reports for 7 years from the date of last activity. For charged-off debts, those also remain on your credit reports for seven years from the charge-off, even if the debt is later transferred to a collection agency, according to this explanation from Experian.

But remember: even if you pay in full or settle the debt, the only thing that will change is your payment status: the negative information on the charge-off will remain for seven years, according to TransUnion. Also, any recent payments you made don’t “re-start” the seven year clock for credit reporting purposes. You’ve already been dinged there. After seven years, that charge-off goes away. See this article, which quotes experts from Experian and the FTC.

Can they try to sue you in court? Yes. Anyone can sue over anything. So sure, a creditor can try to sue over an old debt, but if the debt is too old, a judge would throw out the case. You have an “absolute defense” in matters where the statute of limitations has expired. Furthermore, from a practical standpoint, if a creditor does sue even after they know the statute of limitations has expired, they would be violating the Fair Debt Collection Practices Act (FDCPA) and subject to penalties – which is why a lawsuit would be less likely to occur.

Can they break the law and try to harass you with annoying phone calls? Yes; unfortunately, abusive debt collectors do exist. So repeated or annoying phone calls are a possibility. The only way to make them stop is to assert your rights under the FDCPA and not tolerate such behavior. If a debt collector keeps contacting you, you simply need to write a Cease and Desist Letter and tell them to stop.

One final tip: here’s another really good article I read called 8 Things Debt Collectors Won’t Tell You. There’s lots of good stuff in here about dealing with debt collectors.

A charge-off is a debt, for example on a credit card, that is deemed unlikely to be collected by the creditor because the borrower has become substantially delinquent after a period of time. However, a charge-off does not mean a write-off of the debt entirely.

A charge-off usually occurs when the creditor has deemed an outstanding debt is uncollectible; this typically follows 180 days or six months of non-payment. In addition, debt payments that fall below the required minimum payment for the period will also be charged off if the debtor does not make up for the shortfall. The creditor crosses off the consumer’s debt as uncollectible and marks it on the consumer’s credit report as a charge-off.

Effect of a Charge-Off on Credit Score

The repercussions for having a charge-off on your credit report includes a fall in credit score and difficulty in getting approved for credit or obtaining credit at a decent interest rate in the future.

Paying off or settling the overdue debt will not remove the charge-off status from the consumer’s credit report. Instead the status will be changed to “charge-off paid” or "charge-off settled.” Either way, charge-offs remain on the credit report for seven years, and the affected party will either have to wait out the seven years or negotiate with the creditor to have it removed after paying off all the debt. In the latter case, if the inability to repay the debts on time was due to a temporary setback like job loss, the debtor could write to the lender detailing the issue with proof of a good payment history up to the time he lost his job.

Charged-off debt does not mean that the consumer does not have to repay the debt anymore. Soon after the lender has charged off a debt, it could sell the debt to a third-party collections agency that would attempt to collect on the delinquent account. In effect, a consumer owes his debt until it is paid off, settled, discharged in a bankruptcy proceeding, or in case of legal proceedings, becomes too old due to the statute of limitations.

The statute of limitations is the amount of time a debt can be collected through the legal court system. Once the statute of limitations has passed, the debt is deemed too old to be collected. A debtor can still have a charge-off on his or her credit report after the statute of limitations has passed. In this case, he cannot be brought to court for the unpaid debt. In fact, the debtor can countersue the collections agency that took him to court over a time-barred debt. A debtor can also sue if an agency attempting to collect on an old debt is asked not to contact the consumer again and does so anyway. Such actions are in violation of the Fair Debt Collection Practices Act (FDCPA) rules.

On the other hand, the removal of a charge-off status from a consumer's credit report does not mean the statute of limitations has passed. If after seven years, the charge-off is deleted from the report, the statute of limitations may still be in effect. In this case, the consumer can still be taken to court for a judgment on his unpaid debt. Each state has its own statute of limitations on debt, which, depending on the type of debt, could be as low as 3 years or as high as 15 years.

Note that just because a debt has passed the statute of limitations on its payment does not mean that the consumer no longer owes. It just means that the creditor or debt collector will not be able to get a judgment in court for the payment of the old debt.

Creditors refer to uncollectible debt as bad debt. When a firm incurs bad debt, it writes off the uncollectible amount as an expense on the income statement. For a debt to qualify as a business bad debt, it must be incurred as part of normal business operations. The debt can be associated with either another business or an individual. Bad debt charge-offs are more likely to occur when associated with unsecured forms of credit, such as credit card debts or signature loans.

A Charged-Off Account Is Not a Good Thing

If you are struggling to make payments on credit accounts, receiving a message like this – “Your account has been charged off!” – might sound like the answer to your dreams.

It is not. In fact, just the opposite is true.

The term “charge-off” means the business that gave you the loan, typically a card company or retailer, has written off the amount owed as uncollectable, closed your account, and declared it a loss.

But you still owe the debt. And there will be considerable damage to your credit score.

That is the ominous dark cloud that hovers over people who can’t keep up with their bills or just refuse to pay them. When consumers don’t pay on an account for 180 consecutive days, lenders can choose to charge-off the account.

When that happens, the lender reports it to the three major credit reporting agencies —Experian, TransUnion, and Equifax — and it becomes part of your credit report for seven years, even if you pay off the balance before then.

In other words, if you pay off the debt two years after it was charged-off, the negative impact remains on your credit score for another five years, making it difficult to get a mortgage, auto loan, or even a debt consolidation loan.

Options Available When Account Is Charged-Off

When an account is charged-off, you still owe the debt and it can be collected by the original creditor or by a collection agency.

The original creditor might make an attempt to recover it, but usually hires a collection agency to go after the debt. Even more frequently, the creditor sells the debt (usually for pennies on the dollar) to the agency and steps away from the matter altogether.

Once you receive notice that your account has been charged-off, there are several options available:
  • Find a way to resolve the debt with the original creditor or collection agency
  • Enroll in a Debt Management Plan
  • Attempt a debt settlement for less than the amount due
  • Do nothing and wait seven years for the account to be removed from your credit report

The best option is to resolve the debt with the original investor. Ideally, you would somehow come into enough money to pay off the debt in full. If this happens, be sure your credit report reflects that the debt was paid in full.

Failing that, you should contact the creditor directly or hire an attorney to negotiate a resolution that both sides can live with.

Know how much a month you can afford before starting this process. Only agree to pay what you can reasonably afford each month. When you are finished negotiating and are satisfied with the agreement, ask to see it in writing and have the creditor/collection agency sign it. Never send money before seeing a signed agreement, especially when dealing with a collection agency.

If trying to deal with charge offs is overwhelming you, it might be wise to find a non-profit credit counseling agency and ask for help there. The credit counselors can help you better understand how to manage your money, set up a budget, and, if it helps provide a solution, enroll you in a debt management program (or DMP).

A DMP is an agreement to pay off the debt in full over a period of time that is agreed upon by both sides. The credit counseling agency might be able to convince the lender to reduce their interest rates, get late fees and other penalties reduced, and thus make it possible for you to solve the problem in a 3-to-5 year time frame.

Once you have paid off the entire amount, you can ask the credit bureaus to change the account status to: paid in full, balance zero. The account will still show that it was charged-off for seven years, but your credit score will improve and future lenders will look more favorably at your status.

Debt settlement is another option, but one that carries severe risk. Debt settlement is when a lender agrees to settle an outstanding debt for less than what is owed — sometimes significantly less. Some lenders won’t deal with debt settlement agencies.

Another negative to consider in a debt settlement is that if some portion of your debt is forgiven or canceled, you may have to report that amount as “income” and pay the appropriate taxes.

Finally, credit scores suffer — sometimes even dramatically — from debt settlement. It is a way out, but consider alternatives like debt consolidation and DMP before making a final decision.

The “do nothing” approach means you have surrendered. The information that you failed to pay a debt sits on your record for seven years. It is very unlikely you would be extended any credit during that time.

The good news from that is that there is a “statute of limitations” in every state that says debt collectors can’t sue you in court over a debt after a certain amount of time. That statute of limitations varies from state-to-state, but is generally somewhere between 3 and 6 years. Collection agencies can still try to collect on unpaid debts, but if there is no court judgment against you, there is no way to force you to pay. The debt is essentially uncollectable.

So while your credit report and score will have the stain of a charge-off on it for seven years, the debt itself could be gone after six.

And be sure to get your free annual credit report from each of the three credit bureau reporting agencies to make sure your account doesn’t inaccurately reflect a charge-off that never happened. Mistakes like that do happen, but only you can catch it and dispute it.

Charge-Offs Hurt Your Credit Rating

Charge-offs can have serious and damaging effects on a borrower’s credit rating and credit score.

A charged-off account will be reported to the major credit rating bureaus and remain on your credit history for seven years, making it difficult for you to get new credit for a long time. It is a red flag to potential lenders and suggests that you have ignored your financial obligations, as well as the opportunity to negotiate a suitable solution with a previous lender.

That is why it is advisable to try and settle a credit card debt before you have defaulted on your account and it is charged-off. Settling your credit card debt for less than you owe will require you to call your credit card customer service department and ask to speak to someone in the settlements department. You will need to explain your situation and let the person know that you would like to settle the account with the amount of cash you believe you can afford.

While it is possible that your credit card issuer will refuse to accept a partial settlement of your debt, it is just as likely that you may be allowed to settle for either a lump sum payment, a renegotiation of your payment terms that may give you more time — typically an extra 90 days — or a combination of the two, in order to settle your account before it gets charged-off.

In fact, many of the major credit card issuers like Bank of America, Chase, Citibank, Capital One, and Discover allow pre-charge-off settlements combined with payment terms to help with your credit card debt.

For example, suppose you owe $5,000 on your credit card and your bank allows you to settle the debt for $2,400, but you’re entering your fifth month of missed payments. In order to forestall a charge-off, the bank will also extend the time you need to retire the loan by having you agree to pay $800 a month for the next three months – two months longer than the typical 180 days before an account is usually charged-off.

However, once you agree to the new payment terms, you must adhere to them, because you will not be given any extra leeway.

The major advantage of settling before charge-off is that your credit rating will not be as negatively impacted than it would be if you wait too long before dealing with your delinquent account. In addition, banks are generally easier to work with than collection agencies.

If your account is charged-off and sold to a collection agency, you generally will have to cope with their more aggressive tactics. If your account is sold to an attorney, you risk getting sued.

The potential drawbacks: you might pay more to settle with a bank than with a bill collector, and you will have less time to come up with the settlement money. Also, some banks will not work with debt settlement companies, but only directly with you to settle a debt before charge-off. If you are working with a debt relief firm, make sure you first ask your creditor about its policies.

In most cases, however, it is still advisable to settle your credit card debt before it is charged-off.



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