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What does it mean when an account is reported as "charged off" on your credit report?

Consumers are often confused about what "charge off" means. People mistakenly believe they don't have to pay back the debt after it is "charged off." Unfortunately this is rarely true. Doing nothing about your charged off account(s) may come back to haunt you.

Credit cards are the most common charged off accounts. When an account is severely delinquent, usually six to nine months of missed payments, creditors will report an account as charged off. At this point the creditor no longer believes it will be able to collect any of the money owed. The creditor reports the account to the credit bureaus as a "charge off." The creditor usually sells the bad debt account to a third party debt collector or reports the debt as a loss.

If the creditor reports the account as a loss, the information will be reported to the Internal Revenue Service (IRS). The creditor is notifying the IRS it "lost" the money loaned. Since the creditor will not be paid back, it wants an income tax credit. The IRS then taxes the borrower for the charged off account. At the end of the calendar year the creditor will issue the borrower a form called a 1099-C. The IRS considers the 1099-C taxable income. If you receive a 1099-C for a charged off debt, you should speak with a tax professional. There is a good chance you will have to pay income taxes on the cancelled debt.

For example: "Creditor A loaned you $10,000 and you stopped paying the debt. Creditor A reports the account as a charge off to the IRS and also to the three major credit bureaus. Creditor A sends you a 1099 at the end of the year. Assuming you are in the 25% tax bracket you will pay $2500 of income tax on that debt and the charge off will remain on your credit report for 7.5 years."

A creditor can sell a charged off account to a third party debt collector. The debt collector then steps into the shoes of the original creditor. The debt collector is given the right to resume collecting the debt. Collection calls resume, notices are sent demanding payment, you might be threatened with a lawsuit or worse receive a lawsuit in the mail, your wages may be garnished, bank accounts levied and liens attached to your property.

Sometimes there is calm before the storm, the time between an account charging off and being purchased by a debt collector. Beware. No contact often leads people to believe they don’t have to pay the debt. During this transition time collection might stop. You probably won’t get calls, letters or any harassment during this time. But when the account is sold collection resumes at full speed.

Everyday collection agencies buy thousands of past due accounts from companies, banks, payday loan companies and even individuals with charged off debt accounts. The collection agency that acquires the account usually begins aggressive collections including harassing calls, threatening letters, filing lawsuits, garnishing wages, levying bank accounts, attaching liens to property, and even filing a lien with the county recorder.

After working with over 8,000 consumer bankruptcy cases, the Law Offices of Mark L. Miller has become a leader in the San Diego legal community. We provide clients with a fresh start and a life that is free of harassing creditor calls. To discuss your possible bankruptcy case, call us at (619) 574-0551.