Charged Off Accounts Are Still Collectible

A presentation of the Did You Know Series
Did you know that charged off accounts are still collectible? The majority of consumers do not fully understand exactly what a charged off account is. The assumption is that once an account is charged off it is no longer collectible and should have no balance. Unfortunately, this is not an accurate assumption.

Charging off an account is for accounting purposes for the company that is issuing the charge off. A charge off creates a business loss for a company so the company gets a tax deduction for the loss as it reduces the company’s profit. Most companies will not consider a debt a charge off until it has been delinquent for 6 months. They then assume they will not be able to collect the debt and consider it a charge off so they can receive the tax deduction.

However, the debt in reality is still owing and is still collectible. Even if a 1099 is issued to the consumer, the debt still remains. Once the company charges off the account they may then sell the debt to a third party collection agency.

So then, should the consumer go ahead and pay the debt? Probably…especially if it’s a charged off credit card. Paying off revolving debt that has been charged off more often than not helps the credit scores. If possible it should be paid off before it goes to a collection agency. Once the debt is sold, not only will the consumer have the charge off with a balance on their credit report, they will also have a collection. Once an account has been charged off a consumer can usually negotiate with the creditor for a lesser amount than what is actually owed. This can also be done with the collection agency if it is sold to one as the collection agency has probably bought the debt for pennies on the dollar.

Bottom line for a borrower who is in trouble with a credit card is to try to make payment arrangements so a charge off status is never reached. If it does end up becoming a charge off, the best thing to do is to try to negotiate a settlement with the creditor. That way once the balance is gone they can begin to rebuild positive credit and put this experience behind them.