Debt charged off — do I still have to pay?

3 min read

Dear Debt Adviser,
If a debt is charged off, am I responsible for paying off that debt?
— Jenny

Dear Jenny,
Yes, oui, ja, da, si and dui. In any language, including good ol’ American legalese, you must pay. But don’t feel bad about not knowing that, because many people are confused on this fact. After all, if it’s charged off, it sure sounds like it went away, right? And it did — just not away from you. When a debt or any asset is charged off, it is taken off a balance sheet. A debt that has been charged off is normally more than 180 days past due. If no payment has been made in that period of time, the accounting rule is that, because it is unlikely it will be paid in the near future, it can’t be carried on the books as a current asset. Therefore, the debt is charged off. But the accounting move by the creditor to charge off the balance due in no way affects your obligation to pay what is owed.

In the most basic terms, a debt is owed until it is paid. However, state laws provide a statute of limitations for collecting a debt using the courts. The laws vary, but most states do not allow creditors to sue in court to collect on an open-ended account, such as a credit card account, after three to six years. (Unless you reside in my home state of Rhode Island, a debt collector’s dream, with a statute of limitations of 10 years.)

Be aware that some collectors will still attempt to collect by phone and mail, even if they don’t have the option of suing in court.

Besides damaging your credit score, an unpaid charge-off can really harm you when you want to make a major purchase using credit, rent an apartment or apply for a job. Most businesses are wary of someone with any long-term, unpaid credit accounts. Many will overlook a previous history with late payments if you eventually paid what you owed, but they’re usually less forgiving if you did not.

Worried about your debt and credit? Check out your credit score at myBankrate.

Your charged-off accounts will stay on your credit reports for seven years and then must be removed under the Fair Credit Reporting Act. So, if you choose not to pay, you will have to wait that long for the charge-offs to no longer affect you.

My advice is to work out a payment plan to pay what you owe in as little time as possible. You made a mistake and hopefully learned some things that will keep you from making the same mistake in the future. The best way to move forward is to clean up the debt problem you created by paying what you owe and not falling into this trap again.

Resolve to do a better job of managing your finances by putting together a spending plan based on your own personal goals and then keeping to it. Borrowing is OK, but only if you’re sure it will fit into your budget. Most importantly, be sure you save up an emergency fund to contend with unexpected expenses or unemployment. I advise six months’ worth of living expenses as a good starting goal.

If the debt is older than the statute of limitations in your state, you may not have to worry about being taken to court. However, keep in mind it will still be reported on your credit report and may affect your ability to get credit, jobs, promotions, insurance and apartments for seven years from when the account became delinquent.

Looking to pay off old debts? A personal loan can consolidate your debt. Check current rates and example payments.

Good luck!

Ask the adviser

To ask a question of the Debt Adviser, go to the “Ask the Experts” page and select “Debt” as the topic. Read more Debt Adviser columns and more stories about debt management.

Bankrate’s content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate’s Terms of Use.