A creditor has the right to control your debt obligation. A creditor can agree to wipe out the debt at any time. In some cases, the creditor can agree to charge off debt. Charged off debt means the creditor makes a declaration that the debt is unlikely to be collected. It is important to note that when the creditor is chagrining off debt, the creditor is not necessarily saying that the debt is forgiven or no longer owed.
Federal law requires debtors to charge off installment debt after 120 days of delinquency, while other credit accounts have to be charged off after 180 days. The question is whether charged off debt is good for the debtor?
Charged off debt will still be carried on your credit report. In fact, creditors report charged off debt directly to the creditor reporting agencies. However, the debt will no longer be carried on the creditor’s books as a company asset. The company takes a loss for the money loaned that they did not receive back. Nonetheless, the debtor still owes the money. The term charged off debt is only an accounting term.
Charged off debt in some sense is worse than a regular debt. On your credit report, charged off debt indicates the debtor was extremely far behind in making payments, whereas other delinquent debt could only be 30 days behind. Charged off debt also means the situation was so severe, things could not be worked out with the creditor. These factors may serve as red flags to potential creditors.
Naturally, as with any unpaid debt, the debtor’s credit score will take a hit. But, a lowered credit score can always be repaired with better financial habits.
If the original creditor no longer carries the debt on its books, but the debt is still collectible, who will collect it? Usually the creditor will sell the debt to a collection agency. The collection agency will certainly go after the debtor to recover the debt they just purchased. Collection agencies are generally thought to be more susceptible to using abusive collection practices.
As a result, charged off debt probably sounds better than it really is.