For accounting or tax purposes, creditors "charge off" debts. The process involves selling the debt to another organization, usually a debt collector, so the company doesn't have to show the account as a loss on its books. Taking the account off the books helps the company's bottom line look healthier.
Usually, creditors charge off a debt about six months after you stop making payments on the account.
If your account is placed in collection, but not charged off, the original creditor still owns the debt. When you stop making payments, the creditor will often move the account into collections in-house for approximately six months. If successful, the creditor will retain all of the money it collects.
After about six months, most creditors will sell the debt to a debt collector associated with the creditor or a company with no affiliation. Once sold, the creditor charges off the account.
A charge-off doesn't mean collection efforts will stop. Instead, the new owner of the debt—the debt collector—will continue to take steps to collect on the account.
If a creditor charges off your account or places it in collections, it will notify the credit reporting agencies. It 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—as can happen multiple times in many instances. It also shouldn't change if you dispute the account.
Making a payment on an account can be tricky, however. A debt owner must bring a collection lawsuit within a certain amount 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.
Find out about the collection actions available after getting a money judgment against you.