Bankruptcy Vs. Charge Off

by Ciele Edwards ; Updated June 26, 2018
Bankruptcy Vs. Charge Off

If you are having trouble paying your credit card bill, you have the option to cease payment altogether and receive a charge-off, or to file bankruptcy in an attempt to have the debt either discharged or modified. Both options carry risks and benefits that must be carefully evaluated before you make a decision about which choice is best for you.

The Facts

A charge-off occurs when a credit card company writes off your debt for nonpayment. This usually happens when you allow your credit card bill to go 180 days late. A bankruptcy is a voluntary court filing in which you declare that you are unable to pay your current debts. The bankruptcy court will either discharge your debts or, if your income is sufficient, structure a payment plan to help you meet your financial obligations

Benefits of Charge-Offs or Bankruptcy

If you have numerous credit cards in danger of being charged off, a bankruptcy can help you prevent charge-offs from occurring by allowing you to pay your credit card debts with reduced interest rates and fees. If the debt you owe is high, bankruptcy can also protect you from a lawsuit and the judgment that results if you lose. A charge-off, however, does not automatically place you at the mercy of the court. Although the late payments leading up to a charge-off lower your credit score, that damage is typically much less than the credit damage a bankruptcy would do.

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Time Frame

Depending on the type of bankruptcy you file, your case may take anywhere from three months to five years to complete and can remain on your credit report damaging your score for seven to 10 years. A charge-off occurs roughly 180 days after your first missed payment on the debt and will remain on your credit report for no longer than seven years. As time goes by, both a bankruptcy and a charge-off will have less of an effect on your overall credit score.

Misconceptions of Charge-Offs and Bankruptcy

One common misconception about charge-offs is that a charge-off will always lead to a lawsuit. This is not a common occurrence. The original creditor will not file suit unless the debt is extremely high, but the collection agency assigned to collect the debt after the charge-off might sue. If you are informed of your rights or hire an attorney, a creditor is likely to drop the suit because lawsuits over contested debt can be difficult to prove in court. It is not cost-efficient for a creditor to file a lawsuit for a debt less than $1,000 – although it does occasionally happen. Many consumers also believe that paying debts via bankruptcy improves their credit scores. This is not the case. Nor is it a guarantee that any debt balances written off by creditors will not be sold to another company which will then pursue the balance.

Evaluation of Options

You must measure which risk is greater – the possibility of a creditor lawsuit and a judgment, or the chance that you may lose assets like your home or car in a bankruptcy. Bankruptcy courts take all of your current debts and assets into consideration and may liquidate your assets to pay off debts. This includes debts that you do not currently have trouble paying. If you are sued over an unpaid charge-off, however, you can end up with a judgment on your credit report. Depending on whether your state allows garnishment for unsecured debt, this can result in money being taken from your bank accounts and your paychecks being garnished.

About the Author

Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.

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