After several late payments without resolution over 120 days a delinquent credit account can become a charged off account. A charge off is an entry on your credit report that indicates that a creditor, after trying and failing to get you current on your payments, has given up on collecting the debt and closed the account negatively.
Creditors charge off accounts after they have been delinquent for six months. After you have missed the first 30 days payment, your account will move from “Account in Good Standing” to a “Negative Item”. This is when your credit score will drop.
If the creditor decides to charge off the account after 6 months or 180 days, the account will be reflected as a closed charged off account with the remaining balance including late fees and penalties.
The account becomes a collection when the creditor sells the charged off account to a third party agency. The amount due will be zero because you will have to pay the collection agency going forward, but the amount charged off will remain on your credit report as negative for seven years unless you dispute the account and get it deleted.
If a charge off or collection is validated and stays on your credit report, all is not lost. You can contact that creditor and settle the account for far less than what you owe and have it deleted.
You want to deal with it and do not ignore it because having an active charge off does not look good on your credit report.
Why would a creditor do this? For them, something is better than nothing. Whatever the creditor can get is better than them having to write off the debt and get nothing.
When they do write off the debt, they sell it to a third party collection agency for a fraction of that debt. You can negotiate a settlement for deletion with a collection agency as well. They bought the debt for a fraction of what you owed, so they have room to settle the account with you.
In both cases it is imperative to get the settlement in writing.
Send your offer in writing so that you have a record of the conversation especially if they agree on a settlement. If you do not have it in writing, someone else at the creditor may come back and say the settlement never existed. If they do not agree on a “pay for deletion”, ask for a “paid as closed” settlement.
Besides having your offer in writing, get the final settlement from the creditor in writing with the amount to pay, payment instructions, and any other agreements like if they will delete the account or state it as just closed, and that they do not go after you for any future amounts.
Tip: Make sure the collection agency has the rights to collect on the debt. Many times collection debts are bought, sold and transferred to different companies. You do not want to send the wrong company your money.
Tip: If you are negotiating a charged off account, make sure the creditor hasn’t sold the debt to a third party collection agency yet and that the original creditor still have the rights to settle the debt.
Tip: Do not be afraid to offer 20%. You may owe an exorbitant amount for a long period of time but you would be surprised what these creditors will accept to close out a bad debt.
Tip: After you settled and closed the account, check your credit to see how they reported the account on your next credit report. You want to see if the creditor deleted the account, the bureaus deleted the account, or if they moved it to “paid and closed” status.
You can still dispute the account as inaccurate and because it is a closed account, the creditor may not reply and you have a great chance of having the account not showing up at all in the future.
Carl Agard is the Publisher and Editor in Chief of Boss XL Magazine and the Author of the Book "Financially Surviving COVID19 (Deleting Derogatory Credit)"