What Happens When a Credit Card Account Is Charged Off?

When you are sorely delinquent in paying your credit card debts, a creditor may decide to cut its losses and charge off the account. A charged-off account inevitably tanks your credit score and remains in your credit history for numerous years, which makes you less than appealing to prospective future lenders. But when a credit card account is charged off, you still remain liable for the debt. Creditors may even take action against you in court and get a judgment against you.

A creditor charges off your credit card account so it can report the uncollected debt as a financial loss for its own tax-filing purposes. The financial experts at the Credit website indicate that charge-offs usually occur after you haven't paid the debt in 180 days (six months). Slow payments, on the other hand, show up in your credit history as 30, 60, 90, 120 and 150 days in arrears. If your debt has been charged off, the creditor has essentially given up hope that you will repay it.

After a creditor charges off your credit card account, the debt may be sold to a collections agency, which often pursue repayment far more aggressively than the credit card issuer. This is the point at which you begin to receive phone calls and a flurry of notices in the mail. But a creditor or collections agency may also opt to file suit against you in court to obtain a judgment against you. Depending on the laws in your state, the creditor may enforce the judgment by garnishing your paycheck or filing a lien against your personal property.

MSN Money states that credit card issuers who turn your debt over to its collections department or sells the debt to a collections agency will report it to the three nationwide consumer reporting agencies–Experian, Equifax and TransUnion–as two entries, one denoting that the account was charged off and the other indicating that it is in collections. These entries plague your credit report for seven years, after which the records expire and fall off of your report. Steve Bucci, financial adviser for Bank Rate, points out that charged off accounts are the primary reason prospective lenders deny new credit and loans.

Bucci states that paying off charged-off credit card accounts is imperative. This might not remove it from your credit report; it will most likely be listed as a "paid charge-off." But if you want to get loans, including a home loan, you will generally need to pay off all charged-off debts reflected in your credit history. Also, paying old debts protects you against potential lawsuits.

If you have a charged-off debt that shows up in your credit history, Bucci advises contacting the original credit card issuer to determine if you can pay the account to the creditor directly. If not, you may need to work with a collections agency. Find out how much you owe and find out if the creditor or collections agency will work with you to negotiate a settled amount. But never agree to pay more than you can afford to pay, Bucci warns. If you can pay your creditor in full directly, request that the charge-off either be taken off your report or ask the creditor to report it as "paid as agreed." Make sure that you get an agreement in writing before you pay the debt, Bucci advises.