What Does It Mean If Your Debt Is Charged Off As Bad Debt? (2024)

When a financial obligation goes unpaid—whether it’s a credit card, loan or medical bill—it may eventually be charged off as bad debt. In simple terms, a charge-off on your credit report means that a creditor assumes a debtor has no plans to repay a debt voluntarily.

Having a charged-off account listed on your credit report can be damaging to your credit score. It could also lead to additional negative consequences if a creditor decides to sue you to collect what’s owed.

In other words, a charge-off isn’t a get-out-of-jail-free card when it comes to paying off old debts. Here’s a deeper explanation of a charge-off and what it means to have bad debt.

What Is a Charge-Off?

A charge-off or charged-off account is a debt that has become so delinquent that a creditor decides to remove it from the balance sheet. It means the debt has gone unpaid so long that creditors have assigned it a bad debt status.

When an account is charged off, the creditor writes it off as a financial loss. The account is closed and the debt may be sold to a debt buyer or transferred to a collection agency.

Having a charge-off on a credit report doesn’t erase the debt, though. If you have an account charged off as bad debt, you’re still legally responsible for paying it. But instead of making payments to the original creditor, you may owe debt to a debt collector or debt buyer.

When Do Bad Debts Get Charged Off?

Missing a payment or two on a credit card bill or loan won’t necessarily land your debt in the bad debt category. Generally, for a debt to go bad and be charged off, it has to be delinquent for an extended period of time.

Typically, a debt has to go unpaid for anywhere from 120 to 180 days after you become delinquent before a creditor moves ahead with a charge-off—it varies based on the type of account and repayment terms. During this time, you may receive phone calls or letters from the creditor requesting that you make a payment or get in touch to discuss payment options. Any late payments that happen prior to the charge-off can be reported to the credit bureaus.

This can be damaging in itself, as 35% of your FICO credit score is based on payment history. If you do nothing and allow late payments to pile up, your creditor could decide to cut their losses and charge off the account.

Once the creditor wipes the account from their books, it’s charged off as bad debt. Just like late payments and other negative credit information, charge-offs can linger on your credit reports for up to seven years. The creditor, or the entity that owns the debt if it’s been sold, also can move ahead with collection actions.

Can You Be Sued for Charged-Off Bad Debts?

The short answer is, yes, you can be sued for a charged-off account. But it’s important to keep in mind that how long a creditor has to sue you for bad debts can depend on state law.

Each state imposes a statute of limitations on debt. This gives creditors a certain amount of time to collect unpaid debts, typically beginning on the day after the first payment is missed. The statute of limitations can vary by state and by the type of debt. So, for example, if you become delinquent on a credit card, your creditor may have three years to collect. They may have four years or five years to collect on unpaid medical bills or a bad car loan.

One thing to note is that making a partial payment, or even agreeing to pay a bad debt, could restart the clock on collection efforts. Be careful when talking to debt collectors on the phone or corresponding with them by mail.

If you’re sued for a bad debt associated with a charged-off account, it’s important to know your rights. First, your creditor has to serve you with proper notice of a debt collection lawsuit. Once you’re served, there are several things you can do:

• Contact the creditor and agree to a repayment schedule to pay the debt in full
• Go to court and challenge the validity of the lawsuit
• Contact the creditor and attempt to negotiate a debt settlement
• Do nothing

You could offer to make payment on the debt in full with a payment plan. This could help you avoid a lawsuit and further credit score damage. You may opt for a payment plan if you don’t have cash on hand to make a large lump sum settlement for the debt.

A second option is to go to court and challenge the creditor’s lawsuit. You may do so if you believe you’re not responsible for the debt. If you go this route, you’ll need to be able to prove the debt doesn’t belong to you. Otherwise, the court may rule against you.

Attempting to work out a debt settlement could help you pay off the debt sooner. A debt settlement is when the creditor or debt collector agrees to accept less than what’s owed to clear the debt. But this type of debt relief may also cause harm to your credit score, and is better used as a last-resort option.

The final possibility is to do nothing. But this virtually guarantees that the creditor will win the lawsuit. In that case, your credit score will suffer. And the creditor could take additional action to garnish your wages if that’s allowed in your state, place liens against your property or levy your bank account.

How Charged-Off Bad Debts Affect Your Credit

What does a charge-off mean in terms of your credit scores? In a nutshell, nothing good.

Charge-offs can cause your credit score to drop more than it already has if it’s preceded by a number of late payments. If a lawsuit and judgment follow a bad debt’s being charged off, that can deal another blow to your scores. Creditor judgments can stay on your credit reports for up to seven years. But if the judgment goes unpaid, a creditor can ask the court to renew it, which can continue to impact your credit negatively.

Keep in mind that paying a charged-off bad debt, either in full or through a settlement, won’t remove it from your credit reports automatically. Negative items can’t be removed from your credit reports as long as they’re accurate until the seven-year window passes. The good news is that having a charged-off account listed as paid on your credit reports could help to mitigate some of the damage.

What To Do if You Have a Charged-Off Account

If one or more accounts you owe ends up being charged off as bad debt, your mailbox may fill up with letters from debt collectors. In the event that you don’t believe you owe the debt for any reason or you believe it’s past the statute of limitations for collections in your state, you can request a debt validation.

Debt validation means the debt collector has to verify that the debt is yours. You can request a debt validation by sending a letter to the collection agency. The Consumer Financial Protection Bureau (CFPB) has a template you can follow. Once you send the request, all collection efforts must temporarily stop until the debt collector is able to respond and validate the debt.

But what if a charged-off account truly belongs to you?

At this point, you’ll have to decide how you want to handle it. Again, this could mean offering a debt settlement to the creditor or making payments over time. If you believe a charged off debt is close to the statute of limitations in your state, you may choose to do nothing and hope the creditor decides not to file a lawsuit in the meantime.

Talking to a nonprofit credit counselor or debt counselor can help you decide which option to pursue. A credit counseling agency can also help you develop a financial plan for avoiding charge-offs in the future. For example, this may include reviewing your budget and spending habits.

A credit counselor can also look at all of your debts that have not been charged off yet to develop a workable plan for repaying them. They may suggest a debt management plan (DMP), which could help you to streamline your monthly debt payments while also saving money on interest and fees. The more proactive you are in managing debt, the less likely you will have bad debts charged off.