When you learn that one of your bills has been "charged off," it's easy to assume you no longer need to pay it. After all, creditors and lenders declare loans and credit card debts as charged off typically once they've gone 6 months without receiving payment.
Even so, the creditor still has the right to expect payment.
"People think they're out of the woods, and they're not," says Beverly Blair Harzog, consumer advocate and author of "The Debt Escape Plan." (An exception to this is when debt is discharged through bankruptcy.)
Your credit score can take a hit
Failing to pay a charged-off debt will hurt your credit score. A creditor or collection agency may be able to sue to collect the amount owed. In addition, a creditor can revoke use of the account, says Paul Siegfried, senior vice president and credit card business leader at TransUnion.
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The best course of action is to use credit wisely and avoid charge-offs in the first place. If you hit a rough patch, such as a job loss or serious illness that leaves you scrambling to pay your bills, communication is the key.
"Have a dialogue with the lender long before you reach the point of a charge-off," Siegfried says. And, try to come up with a payment plan you both agree to.
The 7-year itch for debt
Once a charge-off appears, you'll want to verify that the amount is accurate and the date listed for the charge-off is correct. In most cases, the information can stay on your credit report for up to 7 years.
You'll also need to start paying off the debt. That will help you shore up your credit.
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One tactic to avoid: assuming you can tell a collection agency you'll pay what's owed after the charge-off is removed from your credit report.
While this maneuver occasionally may work, Harzog warns against counting on it. Removing accurate, relevant information from your credit report, such as the fact that you were behind on a loan payment, makes it less useful for other lenders who need to evaluate your creditworthiness.
When the debt is paid off
Even when a debt is paid off, the charge-off may remain on your credit report for up to 7 years. Even so, Siegfried says the report should show the charge-off and the repayment.
Assuming you act to rebuild your credit, the negative effect of a charge-off will steadily diminish. "With each year that goes by, the impact is less and less," Harzog says.
Charge-offs are serious business, as they can hinder your ability to get future personal loans or other lending vehicles, or even some jobs.
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"It's not the end of the world, but you have to be diligent about going forward in a responsible manner and paying all your bills on time," Harzog says.