Charged-Off Debts, Collections, and Your Credit Report: What You Need to Know

For accounting or tax purposes, creditors often "charge off" bad debts, so the company doesn't have to show the account as a loss on its books. Usually, a creditor will charge off a debt about six months after you stop making payments on the account. The process involves a creditor removing an uncollectible debt from its balance sheets. Taking the account off the books helps the company's bottom line look healthier. The process also typically involves selling the debt to a debt buyer.

Placing a loan in collections, on the other hand, is when the creditor transfers the account to a third-party debt collector or sends it to an in-house collections department, who then tries to collect what the debtor owes.

A creditor who charges off your account or places your account in collections will almost always report those actions to the credit reporting agencies.

What Is a Charge Off and Why Do Creditors Charge Off Bad Debts?

After about six months of no payments, a creditor will typically charge off a debt. This happens when the creditor determines that the debt is unlikely to be collected.

Again, creditors charge off debts as an accounting practice. A charge-off doesn't mean collection efforts will stop.

What Does It Mean to Have a Loan Placed in Collections?

"Collections" is the active attempt to recover payment on a debt. When you stop making payments, the creditor will often move the account into collections in-house or with a third-party collector. If successful, the creditor will retain all of the money it collects (if it collects in-house) or a portion of the money collected (if the debt was placed with a third-party debt collector). Either way, the debt is considered in collections.

The status of being in collections can happen before or after a debt is charged off. Some debts go to in-house collections before being charged off. Debts are also sometimes charged off and then immediately transferred or sold to a debt collector.

Charge-Offs and Collections Appear on Your Credit Reports

If a creditor charges off your account or places it in collections, it will notify the credit reporting agencies. The notation will be "charged-off" or "collections account" on your credit reports. These notations can stay on your reports for seven years. Because a debt might be charged off and then sent or sold to a debt collector, you might have both statuses on your credit reports.

The creditor will tell the reporting agency the date your delinquency began, which is important when determining how long the debt can continue appearing on your credit reports. The date shouldn't change if the account is transferred from one collection agency to another, which can happen multiple times in many instances. It also shouldn't change if you dispute the account.

Statute of Limitations and Payments on Charged-Off or Collection Accounts

Making a payment on an account can be tricky, however. A debt owner must bring a collection lawsuit within a certain number of years, called the "statute of limitations." Sometimes, making a payment on an old debt can extend that period, giving the debt owner more time to file a suit.