What does it mean to have my unpaid debt charged off?

If you’ve ever fallen behind on paying a debt — credit cards, a car loan — you know what usually comes next. You’re charged late fees, your interest rate might go up, your credit scores take a hit and your lender starts getting in touch. But if you fall really, really far behind, eventually your creditors will “charge off” your debt. That means they’ve decided it’s not likely you’re going to pay your debt and they write off the debt as a loss. However, you’re still responsible for the debt and will still be expected to pay it. Here’s what it means to have your debt charged off.

Related article: What is a debt buyer and why should you care?

How your debt getting charged off impacts your credit score

A charge-off is a very serious mark on your credit report because it’s the highest stage of delinquency for an account. An account first shows up as a negative item on your credit report after it’s been delinquent for 30 days. If you continue to miss payments, the status is updated every 30 days until the debt is 180 days old. (For installment loans — mortgages, car loans, student loans, etc. — it might only be 120 days before your debt is charged off.) At this point, your creditor will report your debt as a charge-off and close your account (if they have not already).

Once the account is reported as a charge-off, it will cause your credit score to drop, although your score will already have taken a hit from months-worth of missed payments. Your creditor likely will then turn over your debt to internal debt collection or sell it to a third-party debt collector to get you to pay what you owe.

Debt collectors calling

If your debt was sent to collections, it will appear in the collections section of your credit report, which will hurt your credit score even more. You also might start hearing from debt collectors by phone or mail.

If your debt is old, be careful when dealing with debt collectors. Debts have a statute of limitations, which caps the amount of time that a creditor or debt collector can legitimately sue you for your debt. These limitations vary by state, but most range from three to six years. (Although in some states it can be as long as 10 years.) Even after the statute has expired, debt collectors can still contact you to pay your debt, but they can no longer force you to pay by getting a court judgment against you. If they do file a lawsuit, you still must defend it as being time barred.

Keep in mind that the age of your debt is from the time you missed your first payment and never were current again, not from the time the account was charged off or sold to a debt collector. 

> Related Article: Help! I’ve been sued by a debt collector

Repaying your debt

You can only resolve your debt if you pay it off, reach an agreement to settle the debt for less, or declare bankruptcy. Regardless, a charge-off stays on your credit report for seven years, although the negative effect is has on your credit score will lessen as time passes.

If you’re able to pay some or all of your charged-off debt without falling behind on other debts, it can be a good idea to try. That will help you avoid being sued for your debt and will also improve the outlook on your credit report. A debt that’s marked as “charged-off paid” or “charged-off settled” looks better than one that’s simply marked “charged-off” because it signals to creditors that you eventually made some payments toward your debt.

Settling a charged-off debt or paying it in full won’t immediately cause your credit score to rebound, but it could make it easier for you to get a loan or new credit.

> Related Article: How to settle debt and remove it from your credit report

What happens next

If you pay off your charged-off debt, either in full or for an agreed settled amount, make sure the status of your debt changes on your credit report. 

Of course, it’s always best to avoid having a debt charged off in the first place whenever possible. If you’ve missed several payments on a debt, reach out to your creditor and see if you can settle your debt or agree to a repayment plan. 

If you have a debt that’s already been charged off, take stock of your finances and see if you can afford to pay some or all of the debt. Contact the creditor or debt collector to discuss settling your debt. 

Even if you wind up paying a debt that’s been charged off, it will take some time for your credit score to improve. The best thing you can do for your credit score is to pay all of your bills on time and keep your credit balances low.