Quick Summary
Seeing a charged-off debt on your credit report can be alarming, but it’s important to understand what it means. A charge-off doesn’t mean your debt has been forgiven; it’s simply an accounting tool for creditors. It’s important to understand the possible downsides of both paying and not paying the debt, and a debt relief attorney can help you navigate the decision.
What Is a Charge-Off?
A charge-off is a creditor’s internal write-off of a debt. The creditor writes the debt off as an unpaid loss for accounting purposes, but it doesn’t actually cancel the debt.
A charged-off debt doesn’t necessarily mean you’re off the hook. You still legally owe the debt, and it will remain on your credit report for seven years, which can hurt your credit score.
In many cases, the debt will still be sold to collections agencies, who will continue to pursue payment. When that happens, the debt collector will have the same legal right to collect the debt, and could even take legal action to do so.
Why Paying a Charge-Off Can Backfire
A charged-off debt can be complicated. On the one hand, you still legally owe the debt. On the other hand, paying it off doesn’t necessarily improve your situation.
First, paying a charged-off debt doesn’t remove the charge-off from your credit report. The missed payments and charge-offs will still appear on your credit report, even if they’re eventually marked as paid. While you might see a slight increase, it will be barely noticeable.
Additionally, making any payments toward the debt can restart the statute of limitations or reaffirm a lender’s ability to pursue legal action. In most states, lenders can sue borrowers for unpaid debt for only a certain number of years. When you make a payment on your debt, no matter how big or small, you restart that clock, giving the lender years more to sue you.
Can You Still Be Sued for Charged-Off Debt?
A debt’s charged-off status has nothing to do with its legal enforceability. A charge-off is done purely for accounting reasons. You still owe the debt, and the lender or debt collector still has the legal right to pursue payment. In some cases, this could include suing you for payment, which is especially likely for large debts.
Each state has a statute of limitations that specifies how many years a creditor has to take legal action. Statutes of limitations on consumer debt often range from three to six years, depending on the state. As long as you’re still within that period, the lender can sue you to obtain a judgment,
If you receive a notice of a lawsuit, it’s critical that you don’t ignore it. If you ignore the lawsuit, there’s a good chance your lender will be able to obtain a default judgment against you, giving them the right to more aggressive collection tactics like wage garnishment or bank account levies.
In other words, if you’ve received notice that one of your debts has been charged off, you aren’t necessarily off the hook yet.
What Should You Do Instead of Paying?
So where does that leave us? On the one hand, paying a charged-off debt doesn’t necessarily improve your financial situation. However, failing to pay the debt could result in a lawsuit. Luckily, you have some options.
First, send a debt validation request to any collector who contacts you about your debt. The Fair Debt Collection Practices Act (FDCPA) requires third party collectors to provide written verification of your debt within five days of their initial communication to you.
While you’re communicating with your creditor, avoid verbally acknowledging that you owe the debt or making small payments. The collector might pressure you to do one of these things, but both can restart the clock on your statute of limitations.
Next, if you’re notified of a lawsuit from your creditor, don’t ignore it. Reach out to a debt relief attorney right away, and make sure to respond to the suit within the required period. Failing to do this could result in a default judgment, which is much more difficult to undo.
Finally, consider working with a debt settlement attorney to explore your options. They can help you review the debt to make sure it’s been handled legally by the creditor. Next, they can help you negotiate a settlement with your creditor, meaning you could end up paying less than you actually owe. Finally, if your lender does sue you, an attorney can help you navigate the legal process and give you the best chances of avoiding a judgment.
FAQ
Does paying a charge-off remove it from your credit report?
No, paying a charged-off debt doesn’t remove it from your credit report. Even once you’ve paid it, the account and missed payments will appear on your credit report for seven years and will likely negatively impact your credit score.
Can I be sued for a charged-off debt?
Yes, you can be sued for a charged-off debt. Lenders charge off debts for accounting purposes, but it doesn’t mean they’ve forgiven the debt. They still have the legal right to pursue payment, including by suing you and obtaining a judgment in court. They have the right to sue you until the statute of limitations expires.
What happens if I ignore a charge-off?
If you ignore a charge-off, the lender could take more aggressive collection efforts, including contacting you via letters and phone calls, selling your debt to a collection agency, and even suing you. If you ignore the lawsuit, the court is likely to issue a default judgment against you, giving the lender the right to recover their money through wage garnishment, bank account levy, or other means.
Should I negotiate a “pay for delete” on a charge-off?
A “pay for delete” arrangement is when you pay the debt in exchange for the creditor removing it from your credit report. While some creditors may agree to these arrangements, they have no legal obligation to do so and it’s very rare. In fact, creditors are required to accurately report your debts to credit bureaus, meaning most won’t agree to a “pay for delete.”
When does it make sense to pay a charged-off debt?
It could make sense to pay a charged-off debt if you’re planning to apply for a mortgage or another loan and need a credit report clear of unpaid debts. It could also make sense if you’re at risk of being sued. However, it’s often best to try to negotiate the debt first to resolve it without paying the full balance.
Next Steps
Dealing with charged-off debts is complex, and making the wrong move could result in unnecessary payments or lawsuits. The attorneys at Tayne Law Group have extensive experience helping consumers like you understand their rights and navigate debt collection issues.
If you’re facing debt collection and aren’t sure what your next steps should be, contact us today by calling (866) 890-7337 or filling out our short contact form to set up a consultation. We never share or sell your information, and all conversations are confidential.
