What to Know About Paying Off a Charge-Off

A charge-off can feel like a death sentence for your credit. When you have a debt charged off, your credit scores will drop (sometimes by a lot) and you’ll have negative marks on your credit reports for years. On top of that, you may have to deal with a debt collector.

Despite all of that, a charge-off is definitely not a death sentence for your credit or your finances. While it’s definitely not ideal, there are things you can do to help your credit and finances recover after such a negative event. For example, you can regain points by adding new, positive information to your credit reports.

Understanding the Reality of a Charge-Off

Some people mistakenly assume charge-offs and debt forgiveness are the same thing. But in reality, a charge-off does not cancel your debt. Instead, it indicates that the creditor no longer believes you’ll pay the debt and has called it a loss for accounting purposes.

With charge-offs, the creditor takes one of two paths:

• Transfers the debt to an internal department for collections
• Sells your debt to a collections agency

Charge-offs usually happen once you’re 120-180 days (4-6 months) behind on a payment.

Once your debt is charged off, you may experience a number of negative consequences. They can range from having your credit scores drop to getting unwanted calls from debt collectors or even being sued for the money you owe.

Does Paying a Charge-Off Improve Your Credit Scores?

Paying a charge-off can improve some versions of your credit scores, but not all. There are many different calculators used to generate your scores, and some give you a break when your charge off shows as “paid.”

For example, with newer scoring models such as FICO 9, FICO 10 and VantageScore 3.0, paying a charge-off can improve your credit scores. With other score versions, you may not see any change.

However, even if you don’t gain points, there are other reasons you might want to pay a charge-off. For example, you may need to pay off the debt in order to qualify for a new loan, or to prevent an impending lawsuit.

Pros and Cons of Paying Charged-Off Accounts

Paying off a charge-off is not a magic fix for your credit, but it can help you in certain ways. Here’s what you should know before paying off the debt.

Pros

• Improves newer versions of your credit scores
• Can prevent a lawsuit from a debt collector
• May help you qualify for new loans
• Stops you from having interest and fees added to the balance
• Stops collection calls

Cons

• Does not remove negative information from your credit reports
• Does not guarantee any improvement to your credit scores
• Older charge-offs have limited impact on your credit scores
• Costs money that could be used for other expenses
• If your income is limited, you may be judgment proof, meaning the creditor can’t collect from you, even if they win a lawsuit
• Making a partial payment can reset the statute of limitations in your state

How to Pay Off a Charged-Off Account Strategically

If you’re ready to pay a charge-off, make sure you approach it the right way. Skipping any of the following steps could mean doing more harm than good. Here’s the best way to go about paying a charge-off:

1. Verify the Debt: If it’s with a debt collector, send a Debt Verification letter to confirm that the details of the account are correct, including the amount owed and the date of your last payment.
2. Check the Statute of Limitations: Each state has its own limit on how much time a creditor has to sue you for debt. That time line is known as a statute of limitations. Check your state’s timeline to see if the collector is still within their rights to sue. You may also want to speak to a lawyer to make sure you’re interpreting the timeline correctly.
3. Negotiate a Settlement: Many collectors will accept an amount less than the full balance. If you offer a lump sum, you could potentially settle for just a portion of what you owe.
4. Request “Pay for Delete”: Ask the collector to remove the account from your credit reports once you send the payment. They do not have to honor this request, but it doesn’t hurt to try.
5. Get it in Writing: Do not send any money until you receive a written statement that outlines the terms of your agreement. If the collector won’t send anything, write up your own document and send it to them.
6. Send the money safely: Send a cashier’s check by certified mail and pay for a return receipt. That way you’ll have proof that the collector received the payment.

FAQs About Paying Charged-Off Accounts

Can a debt collector still sue me after a charge-off?

Yes. A charge-off does not erase or forgive your debt. Debt collectors can sue you and garnish your wages or seize your assets as long as the statute of limitations has not expired.

Will paying a charge-off remove it from my credit report?

No. Most negative information will stay on your credit reports for seven years, including charge-offs that have been paid. The only exception is if the debt collector or creditor voluntarily removes the information after you pay.

However, changing the account status from “unpaid” to “paid” can improve some versions of your credit scores and can help you qualify for loans and pass background checks.

Does making a payment reset the statute of limitations?

Making a partial payment on your charge-off can reset the statute of limitations and give the debt collector more time to sue you. This is one reason why it’s important to verify the age of the debt before sending any money.

Should I pay the original creditor or the collection agency?

Payment for a charge-off should go to the company that currently owns the debt. You could review your credit reports to see if the creditor sold it to a third-party collection agency and find the contact information for that company.

What is a “Pay for Delete” agreement?

A pay for delete agreement is an arrangement where a creditor or debt collector agrees to remove a charge-off from your credit reports in exchange for your payment.

If you negotiate a settlement for your charge-off, you can ask for a pay for delete. However, creditors and debt collectors are not legally obligated to remove accurate information from your credit reports.

Resolving Your Charged-Off Debt

Is it worth it to pay off a charge-off? Ultimately, it depends on your situation. If there is a guaranteed positive outcome, then it’s probably worth doing.

For example, you’ll want to consider paying off the debt if you receive notice that you’re going to be sued. If you have the money, paying the charge-off can stop the lawsuit from happening and help you avoid unwanted consequences like wage garnishment.

However, paying off a charge-off is not guaranteed to improve your credit scores. So, if gaining points is your goal, consider other solutions. As always, some of the best ways to improve your scores are by adding new, on-time payments to your credit reports and reducing your credit card balances.

You can also meet with a certified credit counselor like those at InCharge Debt Solutions to get personalized tips for improving your credit and advice on how to manage charge-offs and other debt.