The phone’s ringing. Who is it? Oh, no, not another collection agency. You’re behind on your bills and everyone seems to want to call you about it. Sometimes it feels like it would be so much better if they would all just go away. If they do, they may give up on ever reclaiming what you owe to them. When a lender does this, it is called a “charge-off.”
It may seem that a charge-off is like a mini-bankruptcy without involving the courts or eliminating all your debts and humiliating you and your family. However, charge-offs are serious delinquencies, and can damage your credit and cause you problems even years down the road.
There is a lot of misinformation about charge-offs, so examining the most common myths can help you avoid the nasty things that happen when zombie debt comes to call.
1. Companies don’t charge-off debt until several months of non-payment.
If you haven’t paid your credit cards in a few months, you may be at risk for charge-offs. Technically, lenders must only wait 90 days, although many will wait six months. This can be a problem if you think you have a lot of time to talk to your lender and work out a payment program. By the time you are ready to come to a settlement, they may have sold your debt to a collection agency.
2. Charge-offs don’t hurt your credit.
This is absolutely wrong. Even if you come to a settlement with your lender for a lower amount and pay it off, the settled debt will still remain as a charge-off on your credit for seven years after the last delinquency.
3. Charge-offs discharge debt, which means the consumer owes nothing.
Eventually, your lender is going to give up and stop calling you. But that doesn’t mean that you are out of the woods. Zombie debt can rise again at any time. They can take you to court to obtain a settlement from you. Or, your lender can sell your debt responsibility to a collection agency, which can then go after you.
4. There can only be one charge-off for a loan.
Over time, charge-offs can become a horrible gift that keeps on giving. If your lender charged off your account and sold your debt to a collection agency, the collection agency now has the burden and the benefit of trying to get you to pay your debt. If that agency gives up on you, they too can charge-off your debt and sell it to yet another collection agency. As each collection agency picks up your account, they add fees and damage your credit report further. This is known as a “revolving credit charge-off.”
5. Charge-offs cannot be removed from your credit report.
The good news is that nothing stays on your credit report forever. Most serious delinquencies, including foreclosure, bankruptcy, and charge-offs, only stay on your credit for seven years, as part of the Fair Credit Reporting Act. If you work to keep your credit in good condition otherwise, eventually it will just be a memory. And if you see a charge-off that is listed incorrectly, you can file a comment with the credit reporting agency to have it fixed.
Charge-offs are no simple matter on your credit. They can damage your credit and force you to pay debt that is many years old. But if you take steps to avoid charge-offs, you will never be a victim of zombie debt.
The author of this article is Nicole Johnson, a credit expert and personal finance advisor. In her opinion, BestCreditScoreCompanys.com offers the best advice on improving your credit scores.