A “charge off” and a “collection account” are almost one in the same. They are both debts that can be collected, and that you still legally owe despite what you may have heard.
A “charge off” is an accounting term that corporations use when they file a Profit and Loss statement with the IRS. Profits and loses, including bad debt, is essentially charged off as a business expense. Large corporations file these claims all the time and it is considered a part of doing business.
Although the amount in question is written off at the end of the tax year, it is still legally collectible. There is a good chance that a collection agency will buy the debt and harass the consumer for the money. They may be willing to settle for less on a specified amount because they buy the debt for as little as ten cents on the dollar.
One vital thing to note about charge off accounts is if you decide to pay it, don’t be surprised if it remains on your credit report seven years from the original date of delinquency per the Fair Credit Reporting Act.
If you do have a charge off on your account make sure you take abrupt action. Here are two possible courses of action.
Dispute the claim directly with the creditor. If they fail to budge, write a letter to all three of the credit bureaus describing in detail the dispute. If the creditor doesn’t respond within 30 days they will remove the item entirely from your credit report per the Fair Credit Reporting Act.
If the charge off is legitimate, try and work out a deal with the original creditor directly. Be extremely cautious, and better yet don’t try to negotiate a deal with a collection agency, as you’ll surely get burned. If you work directly with the creditor you may be able to get the charge off removed from your credit report by making a partial or full payment.
No matter what course of action you decide on, ensure you get everything in writing, and never take anyone’s word on anything! If you can’t get it in writing ask them if you can record the phone conversation for proof of the agreement. This won’t work if you are trying for a rapid rescore. However, it will be better than nothing at all!
When you become delinquent on a payment for anything such as a utility bill or a medical bill, the creditor will most likely place your account in “collections”. (These types of accounts have a tendency to go into collections because they are not considered big accounts; this is not always the case though.) The creditor may use a debt collector or collection agency to collect monies outstanding that they deem you owe.
A collection is a major derogatory and one you should avoid at all costs if you want to maintain a solid credit score. If a collection shows up on your credit report, your credit score could drop up to 50 points or more. At this point in time you need to make an intellectual choice. Pay the collection or dispute it?
Collection agencies cannot collect an amount greater than your actual debt unless your state law permits it. They may not use profane language, intimidate you violence, or state that you will be arrested if you don’t pay. If any of them do they are breaking the law and your rights have been violated, seek the advice from an attorney immediately.
The best way to handle a collection dispute is to contact the original creditor and work out a deal immediately. Always try and set up a contract whereby you will pay the amount due if they change the status of the account to “paid as agreed”.
Make sure you get this agreement in writing!!!
If they don’t agree to such an offer, and you know you owe the debt, you may want to pay it to avoid escalating the situation. If you know you don’t owe the debt, write a letter to the credit bureaus disputing that debt and ask them to remove it promptly. Remember, they have 30 days to respond to your request, so be patient.
If you have an old collection that is still unpaid and showing up on your credit report, you may want to hold off on paying it if you are applying for a home loan. We all know that paying it off is the right thing to do, however most likely it will drop your score in the short-term because it will change the last-active date to the latest month.
Keep in mind that lenders can still reject you credit if you have unpaid collections, even if your credit score is considered “good”, or higher than average. They may view unpaid debts in the past as an indication of future mistreatment of credit.
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