Consumer accounts are assets for companies that lend money. If you don’t make payments on your account, however, the debt becomes a liability for your lender. The term “charge-off” is frequently applied to credit card debts but can refer to any debt a lender removes from its accounting ledger after a certain time. Your lender can recover a portion of the balance you owe by selling your charge-off to another company.
Even though your lender receives payment from the creditor that purchases your debt, the lender does not apply that payment to your delinquent debt. Nor does it award the account “paid” status on your credit report. The purchasing creditor – typically a collection agency – will work to collect the full delinquent balance and may even charge you fees and interest in addition to the amount you originally owed. The only way your account will reflect a “paid” status is if you pay of the debt in full.
A lender’s policies determine how long its willing to maintain ownership of a delinquent account before charging off the balance and selling the debt. Banks and credit card companies generally wait 180 days before charging off and selling debts, while hospitals and doctor’s offices may charge off debts much sooner – sometimes within 60 to 90 days.
After your lender sells your charged-off debt, the company that purchased the debt is the legal owner of the account. Should you decide to pay off the debt, you must pay off the creditor that currently owns the account – not the one that originally opened the account for you.
Although there is a limit to the amount of time a creditor has to file a lawsuit against you, there is no limit to the amount of time companies have to sell your debt. Over time, your account can pass from company to company – all of whom will demand payment from you.
Consequences of Nonpayment
The very presence of a charge-off on your credit report severely damages your credit scores. Lenders are hesitant to do business with individuals whose past history demonstrates that they lack effective debt management skills. The credit damage you suffer doesn’t stop with the charge-off. If a collection agency buys your debt from the original lender, it can also report the unpaid debt to the credit bureaus.
The Fair Credit Reporting Act requires companies to report only accurate information on your credit report. Thus, if you pay off the debt after your original lender sells it, the collection agency must report the fact that you paid to the credit bureaus. This does not improve your credit scores, but it does show future lenders that you did not ignore your obligations and repaid what you owed when you were financially able to do so.
- Bankrate: Getting Rid of An Old Charge-Off; Steve Bucci; 2009
- Neighborhood Economic Development Advocacy Project; Debt Collection Basics; 2007
- Bills.com: Can I Make Payments to My Original Creditor Instead of the Collector?; January, 2010
- Federal Trade Commission: The Fair Credit Reporting Act (Section 602/p.3)