Consumer accounts are assets for companies that lend money, but if you don’t make payments on your account the debt becomes a liability. Lenders “charge-off” those debts after they go unpaid for a while, but your original lender can recover a portion of the balance you owe by selling your charge-off to another company. It still won't be considered paid, for credit reporting purposes, until you actually settle what you owe.
Although your creditor may have decided to charge off your debt, this does not mean that you do not still owe the sum in question, most likely with added interest and fees.
Assessing Your Account Status
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.
Exploring Your Time Frame
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.
Assuming Debt Ownership
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.
- Neighborhood Economic Development Advocacy Project: Debt Collection
- Federal Trade Commission: The Fair Credit Reporting Act (Section 602/p.3)
- Equifax. "What Is a Charge-Off?" Accessed Oct. 15, 2020.
- United States Courts. "Discharge in Bankruptcy—Bankruptcy Basics." Accessed Oct. 15, 2020.
- Consumer Financial Protection Bureau. "My Debt is Several Years Old. Can Debt Collectors Still Collect?" Accessed Oct. 15, 2020.
- Federal Trade Commission. "Fair Credit Reporting Act § 605. Requirements Relating to Information Contained in Consumer Reports." Pages 22-23. Accessed Oct. 15, 2020.
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.