If you have failed to make payments on a debt for an extended period you may see a “charge-off” or “write-off” of that debt indicated on your credit report. This does not mean the debt is gone. The creditor can still try to collect it or sell it to a collection agency.
You may also hear the term “write-off” used when you settle a debt for less than its total value. In this case, the debt is terminated, and the creditor agrees to a “write-off” on a portion of the debt in exchange for a settlement payment. In this case the debt has been settled and is no longer active.
If one of these terms is used on your credit report or in connection with a debt you hold, it’s important to understand exactly what’s being discussed. Both of these events can do serious damage to your credit, so it’s also important to understand how you can resolve or avoid them.
Charge-offs, Transfers, Write-offs, and Settlements
If you don’t make payments on a debt, the creditor will at some point decide that the debt cannot be collected. The creditor then declares a charge-off or write-off. These are accounting terms that describe a reclassification of the debt. The debt is not gone. It can still be collected. The creditor is simply declaring that they no longer classify the debt as an earning asset.
If the creditor is a credit card issuer your delinquent account may be noted on your credit report as “closed by creditor”. That doesn’t mean the debt is gone, it just means you can no longer make purchases on the account.
After a charge-off is declared a creditor will often transfer the debt to another party such as a collection agency, which will then try to collect from you.
The term “write-off” is also used in connection with a debt settlement.
- A settlement occurs when you negotiate to pay only a portion of the total amount due on a seriously delinquent debt.
- The write-off is the amount of debt that the creditor agrees to drop in order to collect the rest.
Not all creditors will agree to settlements. If they do, the debt will no longer be collectible, but it will remain on your credit report and it will be noted as “settled”.
If you see the term “write-off” it’s important to know exactly what it means. If the write-off was part of a completed settlement, the debt is no longer active. If the term “write-off” is used to describe a debt that has been declared uncollectible, the debt is still a legal obligation and is likely to be transferred to a collection agency.
How Do Charge-offs and Write-offs Affect My Credit?
A charge-off or write-off occurs after you have repeatedly missed payments on a debt. Those missed payments will be part of your credit history. By the time you reach the point of a charge-off your credit has probably already suffered serious damage.
If your account is transferred to a collection agency, the original account will be noted as closed and transferred on your credit report. The collection agency will open a new account, which will be noted as an account in collections. If you don’t pay the collection agency, your missed payments will continue to be noted and can continue to damage your credit.
A settled debt will be noted as settled on your credit report. This will affect your credit, but the debt will no longer be subject to collection and the impact on your credit will diminish as time goes by. If you use a debt settlement company, they may ask you to stop making payments while they negotiate with creditors. That can do further harm to your credit.
A charge-off will be recorded on your credit report and will remain there for seven years.
All of these situations can do serious damage to your credit and you should avoid or resolve them if you can.
What Can I Do About a Charge-off or Write-off?
If your account has been or is about to be charged off or written off, you need to act as soon as possible. You want to negotiate with the original creditor, not with a collection agency.
Remember that your creditor does not want to sell your account to a collection agency for pennies on the dollar. They would rather collect the full amount from you. If you can offer them a reasonable deal, they may take it and they may even remove the derogatory information from your credit report.
Decide what you can afford to pay, communicate with your creditor, and offer to continue making payments on the account. Try to talk to a person who has the authority to make decisions on your account status.
If you have been unable to pay because of events beyond your control, such as medical expenses, job loss, or a natural disaster, you may qualify for a hardship plan. Many credit card issuers have hardship plans, though they often do not advertise them. Ask your creditor.
You may wish to consider credit counseling or a debt management program. A counselor will work with you and negotiate with your creditors to develop a reasonable payment plan.
You may be able to persuade creditors to settle a debt for less than the original amount, either on your own or with the help of a debt settlement company. Remember that a debt settlement company will charge you a percentage of the debt that they can persuade your creditor to write off. They may also ask you to stop making payments while they negotiate. This could get you a cheaper settlement, but it can also harm your credit.
If your debts are overwhelming and you have no way to pay them, you may wish to consider bankruptcy. It may seem like a drastic move, but it can give you a clean start and many people who declare bankruptcy see their credit recover afterward.
If possible, take these steps before the account is charged off. If it has already been charged off, try to take action before it is transferred to a collection agency.
How to Prevent Charge-offs and Write-offs
Charge-offs, write-offs, and settlements usually occur when debts are long overdue. By this time the creditor has usually made repeated attempts to contact you and your credit has usually already suffered serious damage.
If you owe money and can’t pay, the worst thing you can do is ignore it. It will not go away. Never ignore communication from a creditor. Always respond and try to negotiate. If possible, be proactive and reach out to the creditor as soon as you know you will miss a payment. Taking the initiative indicates that you are serious about paying your debt and will make it easier to negotiate a solution.
If you are deep in debt and facing serious problems making your payments, consider credit counseling or entering a debt management program. The earlier you take these steps; the less damage will be done to your finances and your credit.
You can’t run or hide from debt. Facing it and dealing with it can help you address your debt problem and get on the road to recovery.