Sarah Edwards | April 20, 2023
Summary: If you stop paying for an obligation you owe, your creditor may decide to charge off the account. When an account is charged-off, it means that the creditor has given up on internal collection efforts and is ready to transfer the debt to a collection agency.
This situation may sound familiar: you’ve stopped making payments on an open credit card or loan for whatever reason. Perhaps you lost your job or encountered unexpected expenses you couldn’t avoid.
Your creditor keeps sending you letters and calling you, but you’re avoiding the issue because you know you can’t afford to make payments right now. You check your credit report one day and see your account with the creditor has a charged-off status.
Creditors report your account as a charge-off when they believe it’s unlikely they’ll recover the entire amount you owe on the obligation. Each creditor follows its own specific criteria, but most lenders report charge-offs after three to nine months of nonpayment.
In this article, we’ll explore how charge-offs work, how they can affect your credit, and how to handle them.
If possible, you’ll want to avoid charge-offs since they adversely impact your credit report. A charge-off indicates you can’t accommodate a repayment agreement with your creditor and simply stopped paying your bills. Future lenders may hesitate to provide you with credit since you have a history of not paying your bills.
Usually, creditors don’t simply charge off your account and go away. Instead, they’ll send your account to an in-house or external collection agency that will continue to pursue you for the outstanding amount.
A charged-off account will appear on your credit report for up to seven years after the first missed payment. Even if you end up repaying the bill, you’ll still have a charge-off that anyone who views your credit report will see. However, your creditor will update your status to show you have repaid the obligation.
Some lenders will require you to address all unpaid charge-offs before granting you a loan. This situation is common if you’re applying for a mortgage or apartment.
Let’s consider an example of a charged-off account.
Example: Theresa stopped making monthly payments on her Best Buy credit card. After six months, Best Buy decided to charge off her account because it didn’t believe it would recover the amount Theresa owed. The charge-off appeared on Theresa’s credit report, and when she applied for a mortgage, the lender denied her application. The loan officer told Theresa she must repay what she owes before she can qualify for a mortgage.
Creditors usually won’t charge off your account and call it good. Instead, they’ll sell your debt to a collection agency, which will relentlessly pursue you until you repay.
When your account ends up in the hands of a collection agency, its agents will start calling you and sending you letters. The initial written communication you receive will give you a 30-day window to request debt validation. Otherwise, the collection agency will assume the information it has concerning your account is accurate.
You should always request a debt collector to validate your account. A debt validation ensures that the collection agency is the proper owner of your debt and has up-to-date information about your account and the debt amount.
Draft and send a Debt Validation Letter online in minutes.
Not sure how debt validation letters work? Watch this video to learn more:
Sometimes, collection agencies become fed up with the lack of payments, so they pursue debtors for the amounts they owe through a lawsuit. If you receive notice of a pending debt lawsuit against you, it’s crucial not to ignore it. Otherwise, the collection agency may obtain a judgment to garnish your wages or freeze your bank account.
You’ll know you’re the subject of a debt lawsuit when you receive a court Summons with a hearing date. The Summons will include a Complaint that lists the amount you owe and other pertinent information about the debt.
Your first step to protecting yourself from a judgment is formulating an Answer for the court and the collection agency. In your Answer, you’ll list your defenses from the lawsuit. For instance, you might claim that the debt is past the statute of limitations or that the amount the collection agency is suing you for is inaccurate.
SoloSuit makes it easy to draft and file an Answer to your debt lawsuit.
If you don’t think your defense will hold water with the judge, resolving the obligation before your court date is best. Either repay it in full or arrange a settlement with the collection agency.
Sometimes, charged-off accounts are simply unavoidable. Lost income or an unexpected illness can make even the most organized of borrowers unable to stay on top of their finances. However, it’s best to repay charge-offs when possible to avoid a debt lawsuit.
Do you need help settling a debt lawsuit? SoloSettle offers comprehensive debt settlement solutions.
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You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.
SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.
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Out Debt Validation Letter is the best way to respond to a collection letter. Many debt collectors will simply give up after receiving it.
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