Facts and fiction about charge-offs

When a credit card company issues you a credit card and you pay regularly on the account, everything is fine. But what happens if you stop paying on the account? At some point, the credit card company has to realize they might not be able to collect any more money. When the credit card company realizes the account is no longer making them a profit because of nonpayment, the company will "charge-off" the account and consider the account a “bad debt."

Charge-offs are often the source of confusion for many consumers. Following are the facts and fiction regarding charge-offs.

Fiction: If you don’t pay a bill, a creditor will automatically sue you for payment.

Fact: If you don't pay your credit card bill, a creditor may sue you for payment. However, in many cases, the credit card company does not sue. Instead the credit card company will charge-off the account on their books.

Fiction: Once an account is charged-off, you no longer owe the debt.

Fact: “Charge-off" is an accounting term used by businesses to indicate an account is considered a business loss. Charging off the debt lowers their profits and taxes. You still owe the money.

Fiction: Interest does not accrue on a charged-off account.

Fact: Interest will accrue on any unpaid balance until the debt is repaid. The original creditor or a collection agency can also add penalties in accordance with the original loan agreement and applicable laws.

Fiction: If I repay the debt, the charge off will be removed from my credit report.

Fact: The notation will remain on your credit bureau file for seven years. Even if you repay the charged-off account, the derogatory notation that the account was charged-off, will still remain on your credit bureau file for seven years from the date the account was charged off.

Fiction: I can obtain mortgage with a charge-off on my credit report.

Fact: Because it may be possible for an unpaid debt to turn into a lien on your property, if you apply for a mortgage loan, your lender may require you to pay any unpaid charge-offs.

As always, it is best to consult with an attorney regarding legal matters.

Kim McGrigg is the former Manager of Community and Media Relations for MMI.