Law Office of Rick Morin, PC

What does it mean when a debt is a charge off debt? You might be surprised of the true meaning of the term “charged off.” Read on to learn more about this important concept!

Charge Off is an Accounting Term, Not a Legal Term

A creditor charges off a debt when it can not realistically collect the debt any more. IRS and accounting guidelines control the timing of when a creditor must charge off a debt.

“Charge off” just means that a creditor does not think that they can collect the debt any more. Because of this status, the creditor removes the debt (considered an asset) from their balance sheet. This way, the creditor does not overstate the amount of their assets (debts owed to them).

Importantly, charge off doesn’t change the legal status of the debt. This distinction confuses most people.

Charge Off Doesn’t Control Collectability

Can a creditor sue you after charging off your debt? Yes! This answer comes as a surprise to many people. A person would be making a huge mistake by assuming that a creditor cannot sue over a charged off debt.

A creditor that charges off a debt might also at the same time sell the account to a third party. The charged off status does not stop a third party from filing a lawsuit over the debt.

As you can see, charged off debts can follow a person around for quite some time.

Charge Off Has Nothing to do With Credit Reports

People often assume that a charged off account will no longer appear on a credit report. Unfortunately, this is not true. A charged off debt can, and usually does, appear on a credit report.

Typically, debts are removed from credit reports after seven years of inactivity. In fact, this is true whether or not a creditor charged off the account or not.

The takeaway is this: don’t assume that charged off debts won’t hurt your credit score. As it turns out, charged off debts absolutely will have an affect on your credit report. Ultimately, a person with a charged off account needs to take action to resolve the account.