Understanding the Credit Lifecycle – What Happens When My Account Goes to Charge-Off?

Key Takeaways
  • The longer an account goes without payment the less value it has.
  • When debt reaches charge-off your lender could sell it to a third-party.
  • The account terms and amount owed remain the same whether the creditor keeps or sells the account.
  • The statute of limitations gives creditors a time limit on bringing legal action against you.
  • The statute of limitations varies by state.

Part 4 of a 5-part series of the Credit Lifecycle. The series also includes posts on Understanding the Value of Your Debt Over Time, Pre-Charge-Off Collection Practices, and The Difference Between 1st and 3rd Party Collections. (Link to previous posts)

What is Charged-Off Debt?

Lenders charge-off credit card debt when you fail to make a payment on the account for 180 days. After charge-off, the value of the debt drops substantially as the likelihood of recovery drops even further.  Credit Card issuers are required to charge off debt at 180 days as defined by their regulators, The Office of the Comptroller of Currency otherwise known as the OCC.  This uniform time period ensures that banks accurately categorize their loan losses on credit card portfolios and ensure they maintain adequate loss reserves against anticipated defaults as defined by the banking regulators.

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What Happens to My Account?

After charge-off, the lender may continue collection efforts either in-house or through a debt collection agency. It is also common to sell the debt to a debt buyer, who will continue the debt collection process as the new account owner.

Continued failure to make any payments on the debt could lead to a lawsuit, particularly on accounts with a high balance and where the state of residence is favorable for age garnishment after a judgment has been issued. If you fail to respond or otherwise ignore a lawsuit filed against you, the court will typically rule in favor of the creditor and issue a default judgment, which can provide the creditor with more opportunities to collect the debt.  

A judgment could allow the debt owner to garnish wages, seize bank account assets, or place a lien on your property to settle the debt obligation. A judgment typically does not allow a creditor to seize retirement assets. The avenues for debt collection vary by state and the assets of the borrower.  

When a Charged-off Debt Can Be Helpful in a Debt Negotiation 

Once an unsecured debt like a credit card account is charged off, the value of the account has depreciated in value to between $0.10 -$0.20 of the current outstanding balance when sold outright to a debt buyer.  This value can range substantially based on the balance, state of residence of the debtor, and if a consumer is already enrolled in a debt settlement program.  Many debt buyers today have defined strategies to identify accounts enrolled with debt settlement companies and seek to purchase these defaulted credit card accounts.  

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Since the account has depreciated to such a low level, the new debt owner is seeking to quickly liquidate as much of the portfolio as possible in the lowest-cost manner available.  For debt buyers, this is a numbers game, driven by volume.  Debt buyers would prefer as many “performing” accounts, or accounts that have an active payment plan in place as possible.  This allows them to recognize consistent cash-flow from their portfolios giving them liquidity to purchase more debt on the open market as it charges off and becomes available for sale.  Generally, these buyers are willing to accept deep settlements from the current balance and accept longer-term payments to allows consumers the greatest flexibility to successfully complete the terms of their settlement agreements.

What is the Statute of Limitations and How Does That Impact my Debt?

Each state has a statute of limitations, which restricts a debt owners’ ability to sue the borrower for repayment of the debt. The statute of limitations ranges from three years to eight years.

Creditors must file a lawsuit before the statute of limitations expires if they plan to use legal means to collect the debt. 

In most states, failure to make a payment, acknowledge the debt, or have any activity on the account for the duration of the statute of limitations will eliminate a creditor’s ability to sue for repayment.   

Credit card accounts have the following statute of limitations: 

  • 3 Year Statute of Limitations: AL, AR, AK, AZ, CO, DC, KS, LA, MD, MS, NH, NC, OK, SC, VA, WA
  • 4 Year Statute of Limitations: CA, DE, FL, GA, ID, NE, NM, NV, RI, TX, UT, VT, WV
  • 5 Year Statute of Limitations: IA, IL, KY, MO, MT
  • 6 Year Statute of Limitations: CT, HI, IN, ME, MA, MI, MN, ND, NJ, NY, OH, OR, PA, SD, TN, WI
  • 8 Year Statute of Limitations: WY

What Are My Legal Obligations to Repay the Debt?

A charge-off does not change your legal obligation to repay the debt. Neither does an expired statute of limitations or the seven years a lender can report the delinquency to the credit bureaus. Creditors can communicate with you indefinitely, in an attempt to collect the debt, until you pay the debt, receive a discharge through bankruptcy, settle the account, or issue a notification to the creditor or collector to stop contacting you regarding the debt. While creditors or collectors may lose some leverage or options for collections as time passes, they never surrender their legal right to attempt to collect the debt until the debt is paid in full, settled in full or you notify them to stop contacting you.

Credit Impact

An account charge-off typically leads to additional collection efforts, which can result in duplicate entries for the same debt on your credit report. Debts in collection score more poorly than a missed payment. However, when you experience multiple late payments, and multiple collection accounts, the advanced status will not necessarily lower your credit score significantly. The first account to charge off will have the greatest impact on your score dropping, but subsequent account charge-off will generally not result in a proportional drop in your score.  

If you are struggling with high levels of debt, especially high interest, unsecured credit card debt, your credit score may not be the thing on which you want to focus.  Your credit score doesn’t measure your worthiness or your level of wealth, it is merely an indicator of how much debt you carry and how well you are servicing that debt.  Over time, as you lower your debt levels, pay off or settle your accounts previously in collection, and begin to establish a good payment history, your score will improve.

Final Thoughts

Lenders facing an account charge-off are often willing to negotiate a payoff for less than the full account balance because the value of the account to creditors falls significantly after a charge-off. Professional organizations who settle debt can provide clear insight and help to negotiate the highest percentage possible off your balances and help navigate the fastest way to pay down debts. Debt settlement professionals should be able to give you initial answers to see if they are able to help you with a plan that works to effectively meet your goals to reduce or eliminate your debt.

FAQs
  • What is charged off debt?

    A debt charge-off indicates that the creditor does not expect to recover the amount owed. It’s an accounting term that removes the debt from the balance sheet. Creditors often decide to sell charged-off debts to recover a small amount of the monies due.

  • What happens to my account if it gets charged-off?

     Most lenders charge off debt after the account goes 120 to 180 without a payment. The creditor can continue collection efforts or they can sell it to a collection agency. That company will then own the debt and begin making collection efforts.  

  • What is the statute of limitations on consumer debt?

    The law gives companies a set amount of time to sue you as a remedy for a delinquent account. Companies have between three and eight years depending on the state. Once the statute of limitations passes, the debt is considered time-barred and a creditor can no longer sue as a debt collection option. 

  • Do I still need to pay a debt that is beyond the statute of limitations?

    Creditors can still call after the statute of limitations passes and legally you still owe the amount due. However, once you pass the statute of limitations creditors may no longer bring a lawsuit to force payment on the debt.