When a creditor decides that they’re not likely to collect the money you owe them, they move the delinquent debt from their accounts receivable to bad debt. For accounting and tax purposes, this means that the debt is no longer counted as an asset on the creditor’s balance sheet. Come tax time, the creditor won’t be overstating what their assets are by including bad debt and they can deduct the charged-off account from their gross income. Once an account has been charged off, it cannot be reopened.
If your credit account has been closed due to nonpayment, it is possible that the issuer may charge off your debt and assume you will not pay it back. Once your account has been charged off by the creditor, it cannot be reopened.
Yes, You Still Owe It
A charged-off account does not mean that you no longer owe the money. The creditor may legitimately still try to collect what you owe or, more likely, they’ll sell your debt to a collection agency at this point. Don’t confuse a charged-off debt with a discharged debt. A discharged debt is one that you are relieved of through bankruptcy. A discharged debt does not have to be repaid.
Closed Versus Charged Off
Before a credit card company charges off your account, they almost always close it first so that you can no longer use it and they won’t incur additional bad debt. Unlike a charge-off, when a delinquent account is closed, there’s nothing preventing a creditor from reopening it at a later date. However, the more likely scenario is that, after some time has passed, you will have to reapply for the card. If your circumstances have improved significantly, the credit card company may open a new account for you with a very low credit limit. Over time, if you use the card and pay the balance down regularly, they may incrementally increase your credit limit.
What’s a Debtor to Do?
Accounts closed by the creditor and charged-off accounts both have a very significant negative impact on your credit score. Obviously, the best thing to do is to make your payments on time and avoid getting into a situation where you could have an account closed or charged off. But if it happens, there are some things you can do. You can try negotiating with the credit card company. Offer to pay the balance in full in exchange for their removing the closed or charged-off account from your credit report.
Credit card companies often sell bad debt to collection agencies for a fraction of what’s owed on the account. If your debt has been sold to a collection agency, even if they can’t get the full balance owed from you, they’re still usually making a nice profit by collecting what they can. So you might try offering them a respectable percentage (50 percent is a good number to start with) in exchange for their removing their entry on your credit report. This won’t help your credit rating as much as having the credit card company remove the original negative report, but at least the account will show a zero balance. Very important -- always get any agreements like these in writing before you pay.
Manage Your Expectations
Don’t expect a dramatic improvement in your credit score right away if you pay off a closed or charged-off account. However, repaying any debt can help over time. At the very least, assuming you haven’t incurred additional debt in the meantime, paying off the delinquent account balance will reduce the total amount of money you owe to all of your creditors and improve your debt-to-income ratio. If your credit history is being closely scrutinized by a mortgage company, for instance, explain to your loan office what occurred in your life that resulted in the delinquency and show that you paid it off.
Creditors are not required to update charged-off balances unless the debt has been discharged through bankruptcy or they’ve sold it to a collection agency. However, they should update an account that was paid off. If you’ve paid the debt and it’s not reflected on your credit report, you can dispute it with each credit bureau that still shows it. It’s a good idea to also contact the creditor and ask them to send updated information to the credit bureaus. As always, keep copies of everything.
LeDona Withaar has over 20 years’ experience as a securities industry professional and finance manager. She was an auditor for the National Association of Securities Dealers, a compliance manager for UNX, Inc. and a securities compliance specialist at Capital Group. She has an MBA from Simmons College in Boston, Massachusetts and a BA from Mills College in Oakland, California. She has done volunteer work in corporate development for nonprofit organizations such as the Boston Symphony Orchestra. She currently owns and operates her own small business in addition to writing for business and financial publications such as Budgeting the Nest, Zacks and PocketSense.