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Charge-Off
Definition
A charge-off occurs when a creditor writes off a debt as uncollectible after the borrower has failed to make payments for an extended period.
Explanation
A charge-off typically occurs after 180 days of non-payment. The creditor writes the debt off as a loss for tax purposes and may sell it to a collection agency. The borrower still legally owes the debt. Collection agencies can pursue payment through calls, letters, and legal action.
A charge-off severely damages credit scores and stays on credit reports for 7 years. Paying a charged-off debt doesn't remove it from your report but updates the status to paid.
Example
A $2,000 credit card balance that hasn't been paid in 6 months is charged off by the bank. The debt is sold to a collection agency for $400.