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.
Whereas a charge off will place your credit card debt in the hands of a debt collection agency, choosing to file bankruptcy could result in your debts being liquidated entirely. That being said, your credit score will be severely impacted by a bankruptcy filing.
Understanding 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. You will have the option to file either a Chapter 7 or Chapter 13 bankruptcy.
Whereas Chapter 7 is considered a liquidation bankruptcy, meaning your assets are sold off to satisfy your debts, a Chapter 13 bankruptcy involves the creation of a payment plan that will be used pay back debts you still owe. It is entirely up to the debtor as to which specific bankruptcy plan they will choose in order to resolve their financial troubles; however, a debtor has to meet the requirements to qualify for each type of bankruptcy. In some cases, a Chapter 7 filing will be denied by the courts, leaving the debtor with the choice of either filing Chapter 13 or figuring out another way to resolve the debt.
Charge Offs and Bankruptcy Benefits
Depending upon which specific bankruptcy filing you choose, you may be required to continue to negotiate pay with creditors and find suitable ways to pay back your debts. If you have numerous credit cards in danger of being charged off, a Chapter 7 bankruptcy filing will liquidate these debts.
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 from a bankruptcy.
Exploring the 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.
Charge Offs and Bankruptcy Misconceptions
One common misconception about charge offs is that a charge off will always lead to a lawsuit. Whether or not a lawsuit will be filed depends upon the outlook of the creditor and their determination as to whether or not the debt can be recouped. 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.
Evaluating Your 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.
- Experian: What Does “Charge off” Mean on a Credit Report
- United States Courts: Bankruptcy
- Understanding Bankruptcy: How to File & Qualifications
- U.S. Courts. "Federal Court Finder." Accessed May 18, 2020.
- U.S. Courts. "Chapter 7 Means Test Calculation." Accessed May 18, 2020.
- U.S. Dept. of Justice. "LIST OF APPROVED PROVIDERS OF PERSONAL FINANCIAL MANAGEMENT INSTRUCTIONAL COURSES (DEBTOR EDUCATION) PURSUANT TO 11 U.S.C. § 111." Accessed May 18, 2020.
Ryan Cockerham is a nationally recognized author specializing in all things innovation, business and creativity. His work has served the business, nonprofit and political community. Ryan's work has been featured at Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.