Charge-Off

A charge-off is the balance on a loan or credit card a lender no longer expects to be repaid and removes, or writes off, from its books as a bad debt, typically after an account has been seriously delinquent for a set period, often 180 days in the United States. Writing off a charge-off from the lender's accounting books does not mean the debt disappears for the borrower, who generally still legally owes the balance unless and until it is otherwise settled, forgiven, or discharged through bankruptcy.

A charge-off is reported to credit bureaus and remains one of the most damaging entries on a credit report, since it signals to future lenders that an account was never brought current. Many charged-off debts are subsequently sold to a debt collector or collection agency, which can then continue pursuing repayment from the original borrower.

A charge-off is the lender giving up on actively trying to collect a debt through its own normal process and instead recording it as a loss, but that accounting decision changes nothing about whether the borrower still legally owes the money.

• The lender may continue in-house collection efforts even after the formal charge-off.
• The debt is often sold to a third-party collection agency for a fraction of its face value.
• The charge-off remains visible on the consumer's credit report for a set number of years, typically around seven in the United States.

Consumers facing a charge-off can sometimes negotiate a settlement for less than the full balance, directly with the original lender or with whichever collection agency currently owns the debt, though any forgiven amount may be treated as taxable income in some jurisdictions and the settlement itself is still generally visible on a credit report.

Once a charged-off debt is sold to a collection agency, paying the original lender directly is usually no longer possible, since the agency has typically purchased the right to collect, meaning any settlement negotiation needs to happen with whichever entity currently legally owns the debt.

Most jurisdictions impose a statute of limitations on how long a creditor or collector can sue over an old debt, though this does not stop collection calls or letters, and consumers facing an old charge-off should understand their specific statute of limitations before deciding how to respond to continued collection attempts.

When a lender charges off a debt and later forgives any remaining balance after a settlement, the forgiven amount can be reported to tax authorities as income to the borrower in some jurisdictions, an often-overlooked consequence of settling a charged-off debt for less than the full amount owed.

Analysts and regulators track a bank's overall charge-off rate across its loan portfolio as a key measure of credit quality, with a rising charge-off rate often signalling broader stress either in the bank's underwriting standards or in the wider economy affecting its borrowers.

Consumers working to repair their credit after a charge-off sometimes negotiate a "pay for delete" arrangement with a collector, where the collector agrees to remove the entry from the consumer's credit report in exchange for payment, though major credit bureaus and some regulators have pushed back against this practice, meaning it is not always honoured or available.

Debt buyers who purchase charged-off accounts sometimes pursue legal action to collect, and consumers sued over an old charged-off debt are generally advised to verify the plaintiff can actually prove ownership of the specific debt and the accuracy of the amount claimed, since documentation gaps in resold debt portfolios are not uncommon and can form a valid legal defence.

A charge-off does not disappear simply because the original creditor stopped actively pursuing it; the debt can continue changing hands between successive debt buyers for years, with each new owner potentially restarting collection efforts, though the original statute of limitations clock generally continues running regardless of how many times the debt is resold.