How a charge-off affects your credit and what you can do about it

Yes, you still owe it. A charge-off means the lender has written the debt off as a loss on its own books, usually once a credit card is 180 days past due, but your legal obligation stays the same: you owe the balance to the lender, or to whoever buys the debt from it. The charge-off can stay on your credit reports for about seven and a half years from the first missed payment, whether or not you pay.

What changes after a charge-off is who is collecting, how the account looks on your reports, and which of your options make sense.

Why lenders charge off a debt

Banks don’t charge off accounts as a favor. Federal bank regulators’ Uniform Retail Credit Classification policy, issued through the FFIEC in 2000, tells banks to classify open-end loans such as credit cards as a loss and charge them off once they are 180 days past due (closed-end loans at 120 days). The charge is supposed to be taken by the end of the month in which that point is reached.

The entry moves the loss off the bank’s balance sheet. It is not a settlement, and an accounting write-off is not the same as the lender canceling what you owe. The lender can keep collecting, hand the account to a collection agency or sell it.

How it looks on your credit report

A charged-off card shows up with a status of charged off, and what the balance says depends on what happened to the debt:

• The lender kept it. The account can keep showing the amount you owe.
• The lender sold it. The original account should show a $0 balance and note that it was sold or transferred, and a separate collection account appears under the buyer’s or agency’s name with the balance.

Either way, both entries run on one clock. Under section 605(c) of the Fair Credit Reporting Act, the seven-year reporting period for a charged-off or collection account starts 180 days after the delinquency that led to it began, which puts the legal limit at about seven and a half years after the first missed payment; Equifax and Experian say they remove these accounts seven years after the original delinquency date. A collection account opened later does not get a new seven years, and paying the debt does not restart or shorten the period.

Here is how the dates line up. Say the first payment you missed was due March 15, 2024. The card would be charged off around September 2024, and the charge-off and any collection account could be reported until about September 2031 at the latest. If a collection entry shows a later delinquency date than your real first missed payment, dispute it with the credit bureau.

Who owns the debt now

When an account is sold, the buyer steps into the lender’s shoes and can collect the full balance. It also inherits the obligation to prove what it bought. A third-party collector or debt buyer contacting you must send a validation notice, under the CFPB’s Regulation F, that names the creditor on a reference date called the itemization date, gives the account number and the creditor you owe now, and itemizes interest, fees, payments and credits since then. If you dispute in writing by the date on that notice, collection must pause until the collector sends verification.

Two practical rules follow. Don’t pay a company that can’t show it owns or is authorized to collect the account. And if two collectors contact you about the same debt, ask each for its validation notice before paying either. The full set of collector rules is in our guide to handling a debt collector.

Your options for a charged-off account

The right choice depends on the age of the debt, your state’s law and what you are trying to qualify for next.

1. Pay it in full. The account updates to paid charge-off, or the collection to paid. The negative history stays until its reporting period ends. On scoring, there is a split: FICO Score 9 and VantageScore 3.0 and 4.0 ignore paid collection accounts, while FICO Score 8 still counts them unless the original balance was under $100. A paid charge-off on the original account still counts as a charge-off.
2. Settle for less. Debt buyers usually paid a small fraction of face value, so many will take less than the full balance. Get the amount and the words “settled in full” in writing before you pay, and expect the account to be reported as settled for less than the full balance.
3. Wait it out, if the debt is time-barred. Once your state’s statute of limitations has run, a collector may not sue or threaten to sue you (12 CFR 1006.26(b)), and you can send a written letter telling it to stop contacting you. The account still stays on your report until its reporting period ends.

Before choosing the third path, check two things. The lawsuit clock is set by each state, commonly three to six years, and in some states a payment or a written acknowledgment can restart it. Our guide to the statute of limitations on debt explains how to find your state’s rule. And if you are sued on the debt, answer the lawsuit before the deadline on the summons even if you believe the debt is too old, because an expired limitations period is a defense you have to raise.

The tax side of settling

Forgiven debt is generally taxable income, whatever the amount. When a lender or other applicable financial entity cancels $600 or more, it must file Form 1099-C and send you a copy. Owe $5,000, settle for $2,000, and the $3,000 difference is reportable.

The main way out is insolvency: if your total debts exceeded the fair market value of everything you owned immediately before the cancellation, you can exclude canceled debt up to the amount by which you were insolvent, by filing IRS Form 982. Debt discharged in bankruptcy is also excluded. IRS Publication 4681 has the worksheet. Many people who settle old card debt are insolvent on paper, so run the numbers before assuming you owe tax.

The CFPB’s debt collection pages and the FDCPA text have the rules cited here, and our timeline of what happens when you stop paying a card covers the months before a charge-off.